2025-06-13-花旗集团-美国利率周报_联邦公开市场委员会（FOMC）与尾部风险_36页_986kb

US Rates Weekly Summary

Core Content

This document provides an analysis of the US interest rate market outlook, focusing on the upcoming FOMC meeting and broader market dynamics. It outlines the team's views on yield curve movements, swap spreads, inflation expectations, and volatility, while also touching on fiscal and regulatory factors that may influence the market.

Main Views and Key Information

FOMC and Tail Risks

• FOMC Outlook: The FOMC meeting is expected to be relatively "boring" due to the soft CPI data, which limits hawkish risks but supports a weakening economic narrative.
• Front-End Yields: The team remains positioned for front-end yields to move marginally higher due to the potential for a 1x2 payer spread (3m expiry, 2y tails).
• Tail Risks: Despite the soft CPI, there are still significant downside risks to the economy, especially for 2025. The market is underpricing these risks.
• Treasury Secretary Bessent: Indicates that SLR relief could provide yield effects, but the team does not believe this is likely. However, if the stablecoin market grows to $2tn, the Treasury may lean on T-bills longer than expected.

Yield Curve Expectations

• Curve Steepening: The team is biased toward a steeper yield curve, especially in the 5s30s segment, as opposed to the 2s10s.
• Recommended Positions:
  • Costless 6m 5s30s bear steepener
  • Long the belly of 10s20s30s UST fly
  • Z5/Z6 conditional bull steepener as a growth hedge
  • Short 30y spreads, hedged with a long 20y spreads position

Inflation Expectations

• Inflation Trends: Inflation is expected to remain higher, which supports the team's view on the yield curve steepening.
• Special Topic: A loosening labor market could lead to another summer rally in rates, with forward inflation expectations likely to decline in that scenario.
• Consumer Behavior: Weakness in the consumer is suggested by falling airfares and TSA screenings, indicating reduced demand for goods and services.

Volatility Outlook

• Volatility Containment: The slow-moving Fed is expected to keep rate volatility contained, even amid geopolitical uncertainties.
• Volatility Opportunities:
  • 3m1y and 3m2y 1x2 payer spreads are still attractive under various Fed rate paths.
  • 10y10y volatility is approaching an attractive level to be long.
• Volatility Structure: The team continues to favor short 3m5y straddle and 5s30s calendar spread steepener.

Market Dynamics

Supply and Demand

• T-bill Supply: T-bill supply is expected to continue shrinking as the X-date (theoretical date when TGA is drained) approaches, but it may increase again once the debt ceiling is resolved.
• Pension Fund Demand: Pension fund demand for USTs is likely to remain above 5%, limiting the steepening potential of the yield curve.
• Auction Performance: Recent auctions have gone well, giving little reason to fear short-term supply issues. However, the 30y auction tailed during the buyers' strike period.

Swap Spreads and Deregulation

• Swap Spreads: The team remains short 30y swap spreads, which are expected to fall further as T-bill supply increases.
• IORB and RRP: The idea of eliminating IORB and RRP is discussed, with the potential to reduce interest costs for the Treasury. However, this would require a return to a pre-2008 balance sheet framework.
• Deregulation: The team believes that deregulation could lead to a structural weakness in bank demand for USTs, which could impact swap spreads.

Outlook and Recommendations

Rate Expectations for 2025

• 2y: Spot 3.91%, Forwards 3.78%, Base Case 3.95%, Bull Case 3.10%, Bear Case 4.70%
• 5y: Spot 3.97%, Forwards 4.01%, Base Case 4.05%, Bull Case 3.25%, Bear Case 4.80%
• 10y: Spot 4.36%, Forwards 4.43%, Base Case 4.10%, Bull Case 3.35%, Bear Case 4.85%
• 30y: Spot 4.84%, Forwards 4.86%, Base Case 4.30%, Bull Case 3.65%, Bear Case 5.00%

Trade Recommendations

• Conditional Bull Steepener: Add-on to the existing trade using Z5/Z6.
• Short 3m5y Straddle: To hedge against volatility.
• 5s30s Calendar Spread Steepener: To capitalize on the yield curve's expected steepening.
• Short 30y Swap Spreads: Hedged with a long 20y swap spreads position.
• SOFR/FF Spread Strategy: Expect SOFR/FF to go negative in Q4, with a potential range of +4 to +5 bp in June and July, and -4 to -5 bp from September to November, possibly reaching -10 bp in December.

Appendices and Additional Information

• Appendix I: Model Portfolio Closed Trades
• Appendix II: Treasury Relative Value
• Appendix III: Swap Fly Relative Value
• Appendix IV: Front-End Monitor
• Appendix V: FX-Hedged Yield Pickup
• Appendix A-1: Analyst Certification, Important Disclosures, and Research Analyst Affiliations

Upcoming Events

• Global Rates & FX Weekly Call: A 15-minute call on Monday, June 16th, at 10am NY time / 3pm London time to summarize key views from global rate strategists.

Contact Information

• Jabaz Mathai AC: +1-212-723-1839 | jabaz.mathai@citi.com
• Jason Williams AC: +1-212-723-1837 | jason1.williams@citi.com
• Alejandra Vazquez Plata AC: +1-212-723-0486 | alejandra.vazquezplata@citi.com
• Raghav Data: +1-212-723-4813 | raghavendra.Varma.datla@citi.com

Disclaimer

• Futures Trading Risk: Futures trading involves substantial risk of loss.
• MIFID II Note: Clients subject to MIFID II unbundling should have a full-service research agreement in place to participate.
• Conflict of Interest: Citi Research is a division of Citigroup Global Markets Inc., which may have a conflict of interest with companies covered in its research reports. Investors should consider this report as only a single factor in making their investment decision.