Bank of Korea Signals Potential Interest Rate Hikes as Inflation Remains Elevated 
South Korea Central Bank Signals Cautious Policy Amid Inflation and Middle East Tensions 
ECB Rate Outlook: Ceasefire Eases Pressure but Hikes Still Expected in 2026 
Bank of Japan's Ueda Flags Low Real Interest Rates as Key Factor in Rate Hike Timing 
BOJ Rate Decision in Focus as Yen, Inflation, and Nikkei Hang in Balance 
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.
