USD Rates: Corporate supply and oil price pressures
US Treasury yields continued marching higher amidst a deluge in HG corporate supply and a spike in oil prices. WTI prices spiked USD86/bbl as concerns mount over prolonged supply cuts from Russia and the Saudis. Oil prices are now back at levels last seen in November 2022. Accordingly, in both sequential (MoM) and YoY terms, inflation is about to get a boost if oil prices hover around current levels. A similar picture can be traced when we look at the broader commodities complex using the CRB index as a proxy. While oil prices do not feed into core inflation figures, headline CPI might look less favourable going forward. Optically challenging headline figures might well prompt the Fed to keep rates steady for some time.
In the rates space, there have been broadly three different drivers over the past two months. First, the market is still split on another hike in November but rate cut pricing out to end-2024 has been pared to about 100bps (reasonable in our view). Second, 10Y breakevens have popped back to 2.30%. This figure looks a tad low but is within a reasonable range. Third, the paring of recession worries have reduced term premium, steepening curves in the process. At these levels, we continue to be wary of longer-tenor USTs but will be more comfortable receiving the shorter tenors if 2Y yields pop above 5%.
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