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US CPI Tsy Setup (2/2)

  • OIS markets currently price ~33bp of tightening for the March FOMC (recent Fedspeak has downplayed the odds of a 50bp hike at that meeting, although some regional Fed Presidents have noted that a 50bp rate hike could be on the table further down the line, inflation-dependent), with a cumulative ~136bp of tightening, i.e. circa 5.5x 25bp rate hikes, priced by the end of the year.
  • Bank of America probably have the most aggressive sell-side view on the matter, looking for 7 hikes during ’22.
  • The sell-side and market views are much more aggressive than the Fed’s base case. The latest Fed dot plot (produced in Dec ’21) revealed median expectations of 3 hikes in calendar ’22, although some of those that fell in line with the Fed median have outlined hawkish risks to their views in recent weeks.
  • Zooming out, the 5-/30-Year yield spread operates just above the recent flats. An upside surprise in the CPI release may open the way towards the ’20 COVID vol flats (36.3bp). Through there, the ’18 flats sit nearly 25bp below current levels.
  • 2.00% in 10-Year Tsy yields presents the obvious psychological hurdle in benchmark outright yields in the case of a fresh leg lower in the broader Tsy market. 10s currently yield ~1.92%, operating a touch shy of their recent ~1.97% peak. Note that 10s haven’t traded above 2.00% in yield terms since Aug ’19.

U.S. 5-/30-Year Yield Spread (bp)Source: Bloomberg

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