US rates: Weekly review

The Treasury expects the extraordinary measures to be exhausted no later than November 3 with less than $30bn in cash on hand. The debt limit is expected to be raised in time, and investors do not appear too worried, though "affected" securities have cheapened somewhat on the curve. 

"We maintain our views of shorting 5s and 10s30s Treasury curve flatteners because, in our opinion, too much pessimism is priced into the path of monetary policy, even as the current low probability of a hike by year-end is reflecting recent weakness in data and dovish Fedspeak", says Barclays.

US Treasuries rallied over the week, led by the intermediate sector as activity data surprised to the downside and Fedspeak was dovish on the margin. 5y yields fell to 1.27% and the long end underperformed on the curve with 10s30s steepening to as much as 86bp. However, with core CPI data surprising to the upside, these moves were partially reversed with 5s at 1.33% and 10s30s at 84bp.

Activity data have been somewhat weaker than expected. September retail sales disappointed expectations and real personal consumption is now tracking lower. However, at an annualized growth rate of 3.3%, it still represents one of the strong quarters after the recovery. Manufacturing surveys have continued to surprise to the downside, likely reflecting the weak global backdrop. 

On balance, the data show some slowdown in momentum but with Q3 real GDP growth being suppressed by almost 2.5% due to a in drag inventories and net exports, underlying activity remains strong. Inflation data on the other hand surprised positively. Y/y core CPI rose to 1.9% in September and, core service inflation has risen 2.7% over the past year, the highest since November 2008. Hence, on the inflation front as well, it appears that domestic developments are offsetting the weak global backdrop.