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USD rates are keeping a wary eye on inflation over the coming months. US CPI reached 0.9% MoM (in line with consensus) in March as energy costs spiked by over 10%. Glaringly, the headline figure is now at 3.3% YoY, sharply higher than the 2.4% registered in the preceding month. Optimists might point to core inflation was relatively muted at 0.2% MoM, however, we are concerned that even if energy prices plateau around current levels, the knock-on impact unto core inflation (transport and goods that depend on energy-related inputs) would eventually show up. 
Against this backdrop where energy costs are likely to stay elevated for longer, we would reasonably expect frontend rates to stay high for longer. With CPI likely to hover above 3% for an extended period, it becomes difficult to justify Fed easing unless the labour market shows material signs of weakness (it is not). Current conditions are more akin to overheating than stagflation. From a market’s perspective, we would be watching to see if longer-term inflation expectations start to rise. For now, there are limited signs of this happening with 10Y breakevens still hovering around 2.4%. To recap, this figure was hovering in the 2.6-3.0% range at the onset of the previous energy shock in 2022 (start of Ukraine-Russia conflict which coincided with post COVID reopening). A rise above 2.5% would be an early warning signal for the Fed.
Even as inflation risks loom (especially with the failure of US-Iranian talks over the weekend), we think that 2Y yields face asymmetrical risks to the downside. Current frontend yields are high and are adequately reflected USD 100 / bbl oil. A broadly flat Fed path for an extended period is already priced in and we think that the hurdle for hikes remain high. We think a rough breakdown of odds are as follow – 15% chance of modest rate hikes, 65% chance of flat to modest rate cuts and 20% of an aggressive recession type cuts.
Key watchpoints for Middle East conflict
-US blockade on Iranian ports – 10am US ET (10pm SGT)
-Whether current ceasefire still holds
-Whether another round of US-Iran talks get scheduled after the failed attempt over the weekend
Assumptions / Estimates of USD rates
Frontend – two more Fed cuts in 2H26 to 3.25%
Back end – 4-4.5% neutral
Long-term estimate for 10Y UST and 10Y OIS (2028-2030) – Under non-stressed, moderate economic growth conditions, 10Y UST yields likely between 3.5-4.5% (midpoint 4%) and 10Y SOFR OIS between 2.80-3.80% (midpoint 3.3%).
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- IDR Rates: IndoGB Rally Defies Currency Weakness, But Risks Loom13 Apr 2026
- USD is back as a haven13 Apr 2026
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Related Insights
- IDR Rates: IndoGB Rally Defies Currency Weakness, But Risks Loom13 Apr 2026
- USD is back as a haven13 Apr 2026
- Asia rates: EM rates repairments 10 Apr 2026