CACIB: Rates Volatility, Term Premium, and Stagflation Fears

High rates volatility has persisted since the start of the Iran conflict, with no quick end in sight. Treasury term premium has rebounded from its late-February low as rates have risen alongside higher inflation expectations, driven by investors repricing the near-term policy path and demanding more inflation compensation amid oil price volatility. Although the intermediate sector initially cheapened, it has outperformed on the curve this week, while the 20Y has cheapened versus the 10Y and 30Y in the long end as volatility remained elevated. The curve still looks too steep relative to forwards and appears to have room to flatten, while swap spreads have traded in a wide range alongside volatility and the curve.

Higher oil prices have led rates investors to push back and reduce Fed easing expectations for the rest of the year, even after a much weaker-than-expected February NFP. The early-week selloff in both stocks and bonds reflected a classic stagflation-style cross-market move, reviving comparisons with 2022, when inflation surged and the Fed began an extended tightening cycle.

The next key focus is Friday’s PCE report, where economists expect January headline PCE at 0.3% MoM and 2.9% YoY, and core PCE at 0.4% MoM and 3.1% YoY. If those forecasts are correct, core PCE would reach its highest year-on-year level since March 2024, reinforcing the view that there is little urgency for further easing.