UBS Fixed Income-Global Inflation Strategy _The Global Inflation Friday_ Gale-116180002

ab27 June 2025Global ResearchGlobal Inflation StrategyThe Global Inflation FridaySudden stop to oil risk puts TIPS back to tactical (but long). EURi conviction hardens. USDi. TIPS are tactical again, but with value. US breakevens didn't behave as though the rise in oil would show very much persistence, and they were right not to. The collapse in oil this week has nonetheless pulled down breakevens enough to stop us out of our long 5y TIPS breakeven recommendation.Trade-driven inflation risks continue to moderate. The indications at the end of this week seem to remain that negotiations in course will be given time to proceed (link, link). A flare up of tariff escalation is becoming less likely over the summer. But that does not make us negative short-end CPI. Tariffs will rise meaningfully and the fixings still appear to underprice the likely passthrough - Figure 11US CPI-u. (Although June CPI is likely to remain on the low side, particularly on the SA m/m: Inflation update.) Taking some of the tension out of trade policy, particularly over the summer which can be volatile, should help to shore up medium term growth risks that weigh on longer-term breakevens.Valuations should be supportive for breakevens. TIPS price below 230bp (Figure 15Real yields, spot and 3m forward, SA) at 10y. Without a single, dominant theme to focus on, though, we slip back into more tactical territory for breakevens. The tactics also look supportive though.
Our multi-asset short-term model for 5y5y breakevens this week is a clear buy - Figure 2Our tactical model for US 5y5y CPI zero coupon swaps says buy.
Carry is always a tactical 'hygiene factor', and should be positive all the way through to December.
We would rarely put much weight on technical analysis, and less for inflation. But it's tempting to see 10y CPI swaps at support on Friday as we write: 247bp is a both a 50d MA and a rising support trend line. The relevant range would be set by the downtrade from February to April, with 254bp significant resistance.Figure 4US10y CPI swap technical levels. Suport at 2.47%?In CPI swaps, value is in front end forwards - Figure 9Market-implied paths for y/y inflation. It made sense for there to be a sharp inversion in front end breakevens when risks were skewed toward unrealistic levels of tariffs being reversed and possibly also causing significant economic damage in the meantime. The path toward higher tariffs now looks more sustainable and less likely to cause a recession (particularly given signals from the Fed that they are disposed to accommodate tariff-led inflation). The risk that there is more persistence in tariff-triggered inflation starts to outweigh downside growth risks. That may be particularly true given other unknowns, such as a possible impact of migration policy.Long real yields. Weakening data - especially in labour markets, but also in surveys and forward-looking hard data- makes us positive on US rates overall. Together with value in breakevens, to b