While the last five weeks have seen $1.3 trillion of rate-hike bets have already been unwound - the most ever; the derivative market is signaling there is more pain to come as expectations for lower rates are everywhere.

Just another $1.9 trillion of rate-hike bets to unwind...

 

But as Bloomberg's Tanvir Sandhu notes, rates, skews, and inflation cross-currents suggest lower yields to come this summer...

USD short-dated skews on 10-year tenor remain deeply negative, with receivers trading at a premium to payers. As the chart below shows, the spread between USD 3m10y 25bp OTM payer vol and 25bp OTM receiver vol is still negative signaling expectations of lower rates...

Gamma implied vols remain near all-time lows and lack any expectation of a significant move.

Furthermore, the flatness of the Eurodollar curve has been increasingly pricing in the end of the business cycle...

 

U.S. 2y1m - a proxy for the Fed’s terminal rate - has crumbled to 1.75% along with breakeven rates, having required fiscal-policy expectations to play out to push neutral real rates (r*) away from zero or the term premium to move higher; it has been an unhealthy decline in rates with real rates higher and inflation expectations lower.

Upside for U.S. rates is limited over the summer and is unlikely to see a meaningful sell-off without concrete progress on fiscal reform.

U.S. 10-year yield has broken below the July 2016 trendline and 38.2% retracement from the low in the 2.13-2.15% area; a move to 100-DMA at 2.36% is optimistic, which has acted as a pivot in recent months.

Downside risk seeing extension to 1.96% over summer, in line with lower terminal rates...around 1.75%.