With Iran conflict dragging on more than two months, US bond markets are now stuck in a tight range. 10yr UST is hovering in the range of 4.30-4.4 and rate cuts or rate hike expectations are hovering around 0 by end CY26. Crude oil continues to drive the near-term intraday moves for various assets, and the pullback in the oil price this week has contributed to the recent widening in swap spreads and the decline in implied rates vol. 10y swap spread has widened by as much as 4bps over a 1wk rolling window, which represents one of the sharpest outperformances in Treasuries relative to swaps in recent years. We believe Fed being stuck in a brittle job environment and higher core PCE, rate cuts are out of window. But rate hikes too are distant as job environment is too shaky to be considered solid. Hence markets might be stuck around pricing in +/-10 bps of cuts or hikes by end CY26. Hence carry strategies and received vol positions make more sense than any duration exposure. 1yr-1yr US SOFR is currently at 3.72 where we like to receive half risk and another half risk at 3.90. Stop loss to this view is 4% and profit target is 3.5%. We also like to receive 2*10 US SOFR steepeners around current levels of 22 for an eventual profit target of 40 with stop loss around 14 levels. Next week we also have the Treasury refunding auctions with the 10y new issue scheduled on the same day after CPI. In recent years, there has been a notable tendency of the 10y refunding auctions to perform more poorly in comparison to the reopenings. Given that the foreign takedown for the 10y auction has been trending lower since peaking in January, we are mildly cautious that the upcoming 10y refunding could face some headwinds. On Tuesday’s CPI itself, we see core CPI inflation as likely accelerating to 0.29% m-o-m in April from 0.20%, largely due to technical factors associated with rent-related components. Our forecast translates into a y-o-y change of 2.8% up from 2.6% in the previous month. It is worth noting that NSA headline CPI has generally come in below the fixings market-implied levels since the start of 2025. Even last month after the oil spike due to the Middle East conflict, actual NSA headline CPI came in below the extraordinarily high market expectation. Currently the CPI fixings market is implying 0.78% MoM headline. On the short end, repo markets this week continued to show signs that liquidity in the system is plentiful. We think the recent move lower in repo has been a product of negative T-bill supply in March and April, as well as continued (albeit slower) reserve management purchases (RMPs). We think the next catalyst for a move higher in SOFR could come in July as Treasury warned that they will be increasing T-bill sizes “across the curve” once more, and that the TGA balance could reach $1tn towards the end of the month.
