Bank Of America Recommend Longs In 2-Year U.S. Inflation Swaps At ~2.20%.

Bank of America note that “the inflation market continues to price a faster pace of disinflation than we expect. We think that the wedge between the inflation market and our own forecasts is driven by the outlook for rents and that the market may not be reflecting adequate upside inflation risks. We recommend buying the 2y inflation swap to position for a slower path of CPI disinflation.”

• They note that the current level that marker “has a near 40bp differential vs. our economists' forecasts. We target 2.60% with a stop of 1.90%.”
• “We like the 2y point specifically because it avoids some of the flow based issues we see near term at the 1y point and it should still outperform on geopolitical inflation risks.”
• “Additionally, if shelter disinflation materializes faster vs our forecasts, this should put more downward pressure on inflation in the next 12 months but could support the outlook over the following year.”
• “Spot and forward oil prices are also sitting modestly below our commodity team's forecasts, which, if realized, should also push front-end inflation pricing higher. The key risk to the trade is a material downside shock to growth and or commodity prices.”