FOCUS OF THE WEEK

Tonight’s US CPI print may impact the US Treasuries (UST) curve. The 2Y/10Y segment of the UST curve has significantly flattened since early September, falling from a peak of 22 bps to around 5 bps at present. This flattening largely reflects the repricing of Fed rate cut expectations after the slew of solid labour market data recently. Front-to-belly tenors have been hit harder as Fed cuts got priced out. In the absence of major economic or market disruptions, the UST curve could be trading around par. However, we believe steepening is a more likely scenario, considering that the Fed’s easing cycle appears solidly in place, and strong economic data, alongside rising oil prices, may place an upward pressure on longer-term yields. The upcoming US presidential election in November also plays a pivotal role, with the bond market likely to steepen if the odds of a Trump victory increases. If tonight’s US CPI print surprises on the upside and causes the short-end to rise (and the curve to flatten momentarily), investors could take advantage of this by entering into trades that benefit from future steepening.

Figure 1: Changes in spreads

Source: Bloomberg, DBS. Data as at 9 Oct 2024

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