ECB Warns of Rising Inflation Risks Amid Iran War Energy Shock 
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Bank of Japan Eyes Further Rate Hikes Amid Middle East Tensions and Inflation Pressures 
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Japan Inflation Expectations Rise as BOJ Rate Hike Timing Faces Uncertainty 
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RBA's Hauser Flags Uncertainty on Rate Settings Amid Iran War Economic Risks 
South Korea Central Bank Signals Cautious Policy Amid Inflation and Middle East Tensions 
Federal Reserve Probes Big Banks Over Private Credit Exposure Amid Growing Systemic Risk Concerns 
Bank of America Maintains Forecast for Two Fed Rate Cuts in 2026 Despite Inflation Risks 
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Though Treasury Secretary Steven Mnuchin said this week that he is seriously considering 50-or 100-year debt, we continue to think the scope for adding either maturity point is limited. While internationally, the outcome of the French presidential election remains a very large tail risk.
Last week yields initially rose on the back of Yellen’s semi-annual testimony before Congress, as well as a higher-than-expected CPI report, which led us to pull forward our projections for this year’s rate hikes to May and September versus June and December.
Buy 5-year real yields: With inflation risk rising, the more structural drivers of low real productivity growth still very much in place, and attractive near-term carry, we recommend buying 5-year real rates.
Receive in $300mm notional of a 1Mx5Y forward starting swap (start date 3/28/17, maturity 3/28/22, coupon 2.028%) versus paying fixed in $293.9mm of a 1Mx5Y inflation (US CPI) swap (start date 3/28/17, maturity 3/28/22, zero coupon) at a current spread of -18.1 bp.
Stay positioned for an underperformance of USD swaps in a sell-off by selling 3Mx5Y AUD versus USD payer swaptions.
Stay long $100mn notional 3Mx5Y ATMF USD payer swaption (notification date 5/10/17, maturity date 5/12/22, strike 2.048%, premium 75.8bp) versus selling A$152mn notional of 3Mx5Y ATMF AUD payer swaption (notification date 5/10/17, maturity date 5/11/22, strike 2.595%, premium 60.4bp).
This trade is constructed to be premium neutral at inception and has a forward risk weight of 85%. P/L since inception 5.7 bp.
