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US Rates Strategy: 10 June 2025 Citi Research Analysis

Key Points

1. Real Yields Rise, Breakevens Decline

   • U.S. 5-year breakevens down 5.5 bps; 10-year real yields up 5 bps, reflecting shifting markets.

2. Inflation Outlook Mixed

   • U.S. CPI continuation expected at around 2.7-3.2%; core adjustments show resilience in services vs. goods.
   • Forward 1-month BE carry indicates positive trends for long positions across U.S., EU, and U.K. inflation breakevens.

3. Curve Dynamics

   • Steepening in short-term real yields (e.g., 5y/10y spread) reflects market expectations of policy shifts.
   • 10y BE inversion narrows due to positioning bets (e.g., replicating ARW strategy via belly put options).

4. Forward Rate Analysis

   • 10y real yield FV slopes steady; flat 20y BE suggests divergent expectations for distant inflation compared to near-term risks.

Market Views

• US inflation delaying near-term policy tightening, real yields inverted on tactical shifts.
• Global Bonds Higher carry trades via Butterfly/Steepener positions in linkers; EUR HICP expected to stall at ~2%.
• FX Sensitivity Further cross-border investments may highlight USD savings through inverted curves.