The week is marked by a flattening of the yield curve in a context of moderate risk-off sentiment. This movement reflects tension between persistent macroeconomic constraints and portfolio adjustments focused on hedging.
On one side, still resilient inflation is limiting expectations for monetary easing and maintaining pressure on the short end. On the other, investors continue to extend duration on the long end in order to protect themselves in an uncertain macro-financial environment.
The tightening of the 10Y-2Y spread, which compressed by -8.60 bps to settle at +43.40 bps, illustrates a market divided in two. The short end remains under pressure, with the 2-year up +5.30 bps, constrained by sticky inflation that continues to delay any monetary easing.
Conversely, the 10-year decline of -3.30 bps marks the return of demand for long-duration assets. This movement mainly reflects tactical portfolio management rather than systemic stress, pointing instead to hedging strategies.
The accumulation of duration aims to protect balance sheets against macroeconomic uncertainty, an approach suggested by the slight firmness in repo rates on long maturities. The market is therefore taking advantage of well-anchored long-term inflation expectations to hedge efficiently.
On the 10Y-30Y segment, the move remains measured, showing a marginal steepening of +0.60 bp with the spread at +52.90 bps. The 30-year decline of -2.70 bps closely follows that of the 10-year, forming a particularly compact and homogeneous safe-haven block on the long end of the curve.
Market microstructure further highlights this dynamic, illustrating a search for safety without shifting into generalized panic. On one side, in the money market segment, excess liquidity is leaving the unsecured interbank market in favor of pure collateral, effectively pushing SOFR down toward the RRP floor. This sharp move raises legitimate concerns regarding latent counterparty distrust.
On the other side, the behavior of repo rates on long maturities, which remain slightly above normal levels, demonstrates a much more proactive approach. Far from simply parking cash out of fear, market participants are willing to pay a targeted premium to source and borrow long-duration securities, thereby technically locking in their hedging and duration management strategies.
In addition, primary issuance continues to weigh mechanically on funding conditions, forcing the Treasury to maintain a placement premium on short maturities, visible in the spread between SOFR OIS and 2-year Treasurie.
The market is evolving in a late-cycle phase where persistent inflation limits the Fed’s room for maneuver in the short term. In this environment, investors favor hedging strategies rather than aggressive directional repositioning. This results in demand for duration on the long end of the curve, while the short end remains anchored by expectations of restrictive monetary policy.
The combination of these flows contributes to a flattening of the curve, driven more by technical adjustments and hedging strategies than by a systemic macro shock.
As of today, SOFR futures and the Bills do not anticipate any rate hike for the June meeting. This is consistent with a broader expectation of a cumulative 25 basis point increase by the end of December 2026.
Analysebourses BCE/FED Watch, Implied probabilities of FOMC decisions derived from 3-month SOFR futures.
CME FedWatch, Implied probabilities of FOMC decisions derived from 30-day Fed Funds futures.
| Volatility (HV) |
Trend |
Historical level |
Risk of violent variation |
Move Index (IV) |
HV - Move Index (IV) |
| Long-term |
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Medium |
High |
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| Short-term |
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Standard |
US volatility (HV) curves continue to show strong inertia, with only very localized adjustments. By contrast, European curves experienced a rapid and broad move across all segments, reflecting a much more aggressive tactical reassessment from investors in Europe.
A volatility (HV) cross-analysis of US and EU curves highlights a striking tactical divergence on the 5-year segment.
While the US 5-year is coming under upward pressure and emerging as the market’s main area of uncertainty, the German 5-year is instead benefiting from a very sharp easing. This contrast is even more notable as it takes place within a generalized vol crush at the front end of the European curve, with the German 2-year collapsing sharply against a much more moderate easing in the US 2-year. The market is therefore isolating a specific stress on the belly of the US curve, compared with a rapid and clear normalization across the European short and intermediate segments.
The evolution of long-term volatility (HV) shows broad stability across the US yield curve. The market is not signaling a rise in structural risk and remains in a normalization phase. Investors consider that the main long-term balances, notably inflation and the Fed’s credibility, remain broadly under control.
The comparison between short-term and long-term volatility nevertheless shows that tensions remain concentrated on the short and intermediate term. Short-term volatility remains above long-term volatility across several maturities, indicating that the market is still adjusting its short-term expectations without challenging the long-term framework. Hedging activity therefore remains mainly concentrated on maturities that are the most sensitive to the current economic cycle.
Over the week, volatility movements were highly differentiated across curve segments.
The 2-year recorded a clear easing in volatility, reflecting reduced immediate fears related to monetary policy. In contrast, the 5-year moved higher and became the market’s main point of tension. The 10-year slightly followed this move, while the 30-year remained stable, confirming the absence of stress on the long end.
The structure of the historical volatility (HV) curve is taking a shape centered on the belly of the curve, with the 5-year acting as the main area of uncertainty. The spread between the 5-year and the 10-year confirms this concentration of risk on intermediate maturities.
Conversely, the downward slope between the 10-year and the 30-year shows that current tensions are not spreading toward long maturities. The market therefore continues to view long-term yields as relatively stable.
Fears of a sharp short-term move are gradually declining, while investors continue to limit their exposure to intermediate-term risk. By contrast, the market is not concerned about lasting instability in long-term yields.
The US dollar shows a slight overall consolidation this week, marking an apparent pause after the strong advance observed in the previous period. However, this surface stabilization masks strong structural support driven by the persistence of favorable yield differentials, which continue to reshape global financial flows in favor of US assets.
This macroeconomic dynamic exerts constant pressure on interest-rate-sensitive currencies, leading to large-scale reallocations and a draining of liquidity toward dollar-denominated investments.
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In the Americas, this flow reallocation supports the reserve currency against the Mexican peso, which is affected by both a sovereign rating downgrade and capital outflows toward the more defensive yields of US Treasuries. The dollar also advances against the Colombian peso due to rising risk premia encouraging a broad risk-off move. In contrast, against the Brazilian real, the US currency posts a moderate pullback due to month-end profit-taking, although the underlying trend remains firmly supported by the attractiveness of the rate differential.
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In Europe, the underlying strength of the US dollar weighs heavily on the Turkish lira, with declining local FX reserves and external imbalances pushing investors toward the safety of the US currency despite expectations of rate hikes in Ankara. The dollar also gains ground against the Romanian leu, while its technical pullback against the British pound and the Swedish krona reflects short-term tactical adjustments that do not challenge the overall dominance of capital flows.
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In Asia, the Pakistani rupee is heavily impacted by this global liquidity drain, under pressure from import costs and the burden of US-dollar-denominated external debt, which mechanically increases. The Indonesian rupiah, however, manages to hold up thanks to a central bank response, where monetary tightening combined with export flow repatriation measures has helped stabilize the currency.
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In Africa, the Egyptian pound and the Kenyan shilling illustrate the vulnerability of frontier economies to this capital reallocation, as higher credit costs and commodity prices drain local reserves. The South African rand, meanwhile, benefits from a brief improvement in risk appetite, temporarily limiting the impact of US rates.
After the yen episode, long-term volatility (HV), which remains at elevated levels, has resumed its downward move, driven by a marked decline in short-term volatility (HV), whose pressure remains generally low.
The Indian rupee remains the most exposed in terms of HV, despite a beginning of stabilization.
The single currency is in a continuous downward channel, increasing its overall underperformance due to its status as a currency highly sensitive to interest rate differentials against the US dollar.
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In Europe, the euro loses ground against the Russian ruble due to local institutional interventions and declines moderately against the British pound and the Swedish krona, as investors reallocate portfolios toward central banks perceived as more restrictive in the current high-rate environment. In contrast, the euro outperforms the Hungarian forint, which is being abandoned by investors following negative budget revisions that increase local risk premia and slow its momentum.
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In the Americas, the euro’s decline is clearly confirmed against the Brazilian real and the Chilean peso, driven by unfavorable regional reallocations and end-of-period flows favoring Latin American emerging market yields over European assets.
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In Asia, the euro falls against the Israeli shekel, weighed by local geopolitical hedging, but posts a technical rebound against the Indonesian rupiah, benefiting from a short-term pause after several consecutive down sessions.
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In Africa, the euro weakens significantly against the South African rand, which attracts carry trade flows, while it appreciates against the Tunisian dinar, which remains under pressure from a persistent trade deficit and increasingly limited access to international financing.
Long-term volatility (HV) of the single currency, which is declining faster than that of the dollar, has also resumed its underlying downward trend, driven by a decline in short-term volatility (HV), whose pressure remains low, aside from a few episodic movements.
No change in the trajectory of the EURUSD pair. The recent downward shift of the EURUSD forward curve reflects a rational adjustment to monetary expectations. The persistence of a robust yield differential in favor of the SOFR over the €STR dictates the bulk of this repricing. This relative interest rate dynamic mechanically weighs on the euro's forward valuation. This movement is more akin to a technical revision of the yield curve rather than an aggressive directional flow.
The market implication suggests that the European currency will remain fundamentally constrained by this disadvantageous carry environment.
The week was a simple continuation of the volatility compression phenomenon in the EURUSD pair. The market fell into a low-activity phase, with historical volatility (HV) movements remaining limited, as implied volatility now tests its lower support levels.
Investors continue to massively favor tech giants and the artificial intelligence ecosystem, acting as if the future growth of this sector could be completely detached from the macroeconomic environment. This rush into large growth stocks increasingly resembles a modern flight to quality where tech stocks replace government bonds in the role of a refuge against monetary erosion.
Yet beneath this euphoric surface capital flows reveal strong concerns about the path of interest rates. The conviction that inflation is now a structural component of the 2020s is firmly taking hold in market participants minds. Ongoing tensions in energy and the forced reorganization of global supply chains are pushing fund managers to raise their return requirements on long term debt. In short the market lives in a paradox it buys equities at historical valuation multiples while demanding increasingly high risk premiums in the sovereign bond market preparing the ground for a sharp adjustment if hopes for a strong easing in energy prices fade.
Long-term volatility (HV) in equity indices remains bullish and at very elevated levels. Its advance should slow, held back by short-term volatility (HV), which has started a pullback move.
The only exception is the Nikkei, where the bullish pressure in volatility (HV) remains strong.
The French Lunar Week
Next week there will be no update to this page, Champions League final obliges.
On this subject, it must be remembered that France is today the only country in the world not organizing a fan zone or celebration for the event, a fact that raises questions. But how can anyone be surprised in a context where some now consider the management of tensions as a full political tool in itself? Incidents and unrest are regularly used in public debate to justify security laws, fueling a climate of mutual distrust, particularly toward the suburbs, reduced to anxiety-inducing representations in media coverage.
At the same time, other major subjects pass more unnoticed in public debate, questions of governance, the billion spent by Macron on publicity around an €8,000 drone, is that justified? Or certain industrial and economic affairs that marked recent years, from STX to Alstom, and many others denounced by O. Marleix.
The central question remains, who is responsible for the social and security decline observed in urban and rural areas across the country? Before the Macron period, was the situation comparable in terms of weapons, drug trafficking and organized violence in rural areas? No. In one decade, France has seen several social indicators worsen, rising poverty, weakening public services, hospitals turned into death traps, abandonment of schools, etc.
In this context, some denounce questionable budget priorities between communication spending, military arbitrations or representation costs. While the world considers Macron useless, he summons the US ambassador who answers him "No time for your bullshit." He summons the Israeli ambassador who answers him "No time for your bullshit."
Finally, his political communication sequences are pathetic and reflect his image, like those observed during the cup final, with staging intended to avoid broadcasting images of 80,000 people booing him.
In short, we will return to his tank project and his notorious incompetence.
To be continued… Because, as Audiard said, “They dare everything, that’s even how you recognize them.”
US Bond Market
European bond market
Equity Indices
German bond
French bond
Italian bond
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