inflation Why US yields are heading higher
Back to Home

Why US yields are heading higher

The US 10Y treasury yield soared 20bps in the past week. There are many potential catalysts behind the move, with Evergrande, a hawkish Fed, the debt ceiling and oil reaching over $80 a barrel all worthy candidates. 

Looking at the 10Y breakeven inflation rate, which is a measure of expected inflation (see below), and inflation expectations have barely budged the past 3 months. If the bond market feared that today’s elevated inflation was not temporary, breakevens would be soaring higher, if not faster than nominal yields. This is important to note as it means bonds have an unused catalyst to push on higher from here.

10Y inflation BE
10Y breakeven inflation rate

Markets would instead appear to be waking up to the notion that the Fed won’t be as lenient as hoped, and will start to tighten its monetary policy. With its aggressive tapering set to end by the middle of next year, treasury yields look like they’ll only be going in one direction. 

The dollar index surged to its highest since the successful vaccine trials were announced last November. Higher yields and a wave of risk aversion have aided dollar demand. EUR/USD fell modestly, but is holding above August’s key 1.1664 low for 2021. However, sterling’s collapse beneath its summer lows and opened at its lowest level since January this morning. Political and trade issues are hampering the pound, while the global sentiment is also aiding the dollar.  

We will get updates from Christine Lagarde, Andrew Bailey and Jay Powell at the ECB forum later this afternoon.

US10YSeptH
10 Year Treasury Rate

Interest rate swap vs interest rate cap

Over the last decade, interest rate caps were a popular product to protect against rising rates. However, throughout 2022 the premium has risen substantially. Firms are now switching to interest rate swaps (fixed rates). Given the credit risk, the majority of swaps are conducted directly with the lender, leaving no room for price tension. VUCA’s team of ex-bankers can calculate the true cost of a swap. Contact us today or schedule a call back below to find out more

ECB BOE May 22