Carry opportunities emerge amid policy uncertainty
Rising energy prices have pushed markets to reassess the policy path, lifting yields and improving front-end carry. With bill issuance still elevated, relative value between bills and repo should remain a key theme in cash markets.
Markets began May asking when the US Federal Reserve (Fed) might cut. However, rising energy prices and stubborn inflation risks curbed that easing optimism. They ended the month wondering whether it might hike.
Meanwhile, yields have moved higher, while credit spreads have remained broadly unchanged. Against that backdrop, the June Federal Open Market Committee (FOMC) meeting has become must-watch television.
Energy markets complicate policy path
The macro backdrop remains awkward: growth is not weak enough to support rate cuts, while inflation has risen (April US headline CPI: 3.8%). Energy markets have added a fresh layer of uncertainty, reinforcing the idea that inflation progress may not be linear. When the Strait opens is anyone’s guess.
Rates have responded, though with more restraint than panic, accepting the fact that energy inflation is here to stay. Over the past month, the US 2-year yield has risen by approximately +25 bps (from 3.80% to 4.05%), while the 10-year has moved higher by about +14 bps (from 4.34% to 4.48%). It’s not exactly a tantrum, but it is enough to remind everyone that the market is quietly reassessing the policy path.
Bills yielding more than repo
On the technical side, supply remains steady and largely absorbed. Treasury issuance continues, and while demand is still there, it has required some incremental yield to clear. In the front end, elevated bill issuance has pushed yields higher, creating attractive opportunities relative to repo.
This continues to reinforce one of the least exciting but most important themes in cash markets: relative value actually matters right now. The ability to shift between repo and bills as conditions evolve remains a meaningful advantage.
Credit remains stable
Credit markets, for their part, have shown admirable consistency—or perhaps stubbornness. Credit spreads have effectively not moved at all, remaining tightly anchored despite the shifts in rates and the macro narrative.
That is either a sign of resilience … or a sign that markets are choosing not to deal with that problem today.
Positioning reflects a preference for flexibility over conviction. Front-end rates continue to offer attractive carry, and the lack of clarity around policy direction means that liquidity and optionality remain prioritized.
The market has shifted from debating cuts to reconsidering the entire trajectory. Yields are grinding higher, inflation risks have re-emerged, and spreads are calmly ignoring all of it.
June’s FOMC will matter more than ever as our rookie Chairman will have to handle a press conference that he prefers not to attend.
Until then, the strategy remains straightforward: stay liquid, stay flexible, and avoid declaring victory on inflation just because it briefly cooperated. Markets have done that before. It didn’t age particularly well.