The U.S. Deputy Treasury Secretary has assured us that rising prices aren’t a cause for concern, and inflation is expected to return to normal levels. The U.S. economy seems ready to pick up speed in the second half of the year. There’s confidence that the first date, when we may need to think about raising the debt ceiling, is in August. Deputy Secretary Adeyemo’s statements reflect a calm perspective on inflation in the near future, suggesting that recent price hikes are under control and not gaining speed. This differs from recent data showing ongoing cost pressures, especially in housing and energy, although core inflation has eased a bit. His reassurances are based on confidence in the Federal Reserve’s plans and the strong job market. When he mentioned the “X date”—the time when the U.S. government may stop meeting its financial obligations unless the debt ceiling is raised—being set for August, it indicates that Treasury cash flow and tax revenues are better than expected. This gives us some relief from worries about financial disruptions, easing pressure in the bond and funding markets. The timeline also reduces stress on short-term bills, which have faced challenges due to earlier deadlines. We can conclude that interest rate expectations will respond to upcoming inflation data, but guidance from the Fed and Treasury will be even more crucial. Futures markets have been volatile, influenced by Consumer Price Index (CPI) and Producer Price Index (PPI) updates. While uncertainty about rate paths has decreased slightly, significant fluctuations around major events are still likely. With yields pulling back from their recent peaks and the U.S. dollar weakening, there could be more movement if June data surprises us. This means that volatility premiums are likely to stay high, particularly in short-term interest rate (STIR) markets. It’s wise to keep implied volatility marked aggressively rather than letting it decay too rapidly since the short gamma trade currently isn’t providing the expected cushion. Yellen’s department prefers to increase bill issuance at the front end of the curve, which helps keep longer-term rates steady. This approach could maintain a flattening trend unless new growth data is strong enough to prompt a shift in the Fed’s outlook. Consequently, the Secured Overnight Financing Rate (SOFR) has maintained a narrow spread to its upper target, reflecting stable conditions in the repo market. Next, we will focus on treasury auctions and how they cope with rising supply. If demand seems risky or falters further, it could put pressure on positions, especially for those heavily investing or relying on balance sheets. We’ve noticed a pattern of cautious activity at the beginning of the week, with increased trading later on—this trend may continue for now. We’ll also be watching for any Fed updates about the balance sheet, particularly if Treasury reinvestments slow down, which may affect dollar liquidity perceptions. If that occurs, spreads on front-end Overnight Indexed Swaps (OIS) could widen as cash gets pulled in. This flow could disrupt calm on the rate front, leading to adjustments in volatility curves across intermediate rates. We need to stay alert—continuing to manage our strategies and focusing on opportunities where market instability aligns with pricing inefficiencies. There’s a lot ahead that may require ongoing adjustments.

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