USD Rates: Digesting inflation

Extend SGD rates outperformance over USD rates to longer tenors
Eugene Leow14 Oct 2021
    Photo credit: Unsplash Photo

    USD rates took CPI data and Fed minutes in stride. Headline CPI (at 0.4% MoM sa) was a tad higher than consensus estimates of 0.3% while core inflation was in line at 0.2%. On a three-month annualised basis, we note that inflation momentum has finally moderated. Price pressures that we saw at the start of the year were clearly not sustainable as a large chunk was contributed by used car and truck prices due to supply issues. This component is moderating. Meanwhile, there is some broadening in price pressures, but nothing to suggest that inflation is a problem serious enough for the Fed to aggressively frontload tightening. That said, with the surge in energy prices over the past few weeks, reopening components in the CPI basket moderating at a slow pace and wages rising, it is difficult to envision inflation being transitory. Inflation could well stay elevated some time and this is also reflected with the 10Y breakeven closing above 2.5%. All eyes will be on PPI figures due later. 

    Fed minutes reiterated that normalisation is imminent, which officials considering a taper start in either mid-November (shortly after November’s FOMC meeting) or in mid-December. This is in line with a view we have held since early 2021. The pace of reduction would likely be USD 15bn per month, setting the stage for taper to be completed in June/July 2022. This sets up a potential rate hike as early as 4Q22. 

    We think that the market has looked past taper and is now looking at the upcoming hike cycle.Note that the US Treasury curve flattened aggressively over the past two trading sessions. A lot of it is driven by the 30Y tenor, where yields fell by 13bps. We remain in the bear flattening camp over the coming quarters noting that this phenomenon tends to play out ahead of Fed hikes. Upward pressure is likely to be more apparent in the 2Y-5Y tenors as the market prices in rate hikes. Meanwhile, we are more neutral on 10Y yields at current levels, noting that this rate is already in the lower part of the 1.5-2.0% pre-pandemic range. Pay positions on 10Y would probably be interesting only if the yield falls to 1.50% or below. 30Y yields are close to our fair value floor of 2%. Auction demand was strong as investors probably took the chance to buy after a barren summer when yields were depressed. At 2.03%, we think 30Y UST looks a bit rich.   

    Eugene Leow

    Senior Rates Strategist - G3 & Asia
    [email protected]

    Subscribe here to receive our economics & macro strategy materials.
    To unsubscribe, please click here.


    The information herein is published by DBS Bank Ltd (the “Company”). It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. This research is prepared for general circulation.  Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies. The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. 

    DBS Bank Ltd., 12 Marina Boulevard, Marina Bay Financial Centre Tower 3, Singapore 018982. Tel: 65-878-9999. Company Registration No. 196800306E. 

    DBS Bank (Hong Kong) Limited, a company incorporated in Hong Kong with limited liability.  18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.

    The information set out in this website ("Information") is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction (including but not limited to citizens or residents of the United States of America) where such distribution, publication, availability or use would be contrary to law or regulation. This Information is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction (including but not limited to the United States of America) where such an offer or solicitation would be contrary to law or regulation. This Information is published for general circulation only and does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person. Visitors accessing this website should always seek advice from an independent financial adviser regarding the suitability of the Information referred to herein (taking into account the specific investment objectives, financial situation and/or particular needs of each person in receipt of the Information) before making any investment and/or any purchase in reliance of the Information. Please refer to the actual research publications for important disclaimers and disclosures, where applicable.