As we navigate the current energy shock, it’s important to keep a close eye on the shape of the yield curve. While some premium has been taken out at the short end, we believe there is still room for normalization in the longer end, particularly in the US. In this blog post, we will explore the potential opportunities in the 5y5y curve and why we think buying 5y5y in the US may have an asymmetry.

To begin with, let’s take a look at the HICP/CPI 5y5y cross market. While energy prices have risen significantly, there is limited evidence to suggest that passthrough exists on the horizon. In Europe, the 5y5y repriced higher despite this, and we believe this is something worth considering.

In addition, the BEI curve in the US is overly flat, which could lead to more upside in the longer end of the curve. This, combined with the energy shock, presents an opportunity for investors to consider buying 5y5y in the US.

However, it’s important to note that this is not a one-way bet and there are potential risks to consider. The impact of the energy shock on inflation in the long run is still uncertain, and there could be further volatility in the curve as markets digest this information.