Currently the 10yr SOFR rate is 3.55%, and it is highly probable that US inflation trends up to the 3.5% area in the coming months. That implies a zero real rate, or the prospect of a negative real rate should the 10yr SOFR rate trend lower from here. Given the market mood, it likely will, partly as the inflation ahead has yet to be proven.
The absolute limit for the 10yr SOFR rate should be the bottom of the rate cut cycle, discounted now at 2.75% – 3.00%. Realistically, a 50bp spread to that is a fair value floor for the 10yr SOFR rate. That churns out 3.25% as an absolute low. And equates to a 3.75% 10yr Treasury yield (given the 50bp swap spread).
But these are not sustainable levels. It is quite probable that the market begins to run scared of upcoming inflation prints. We agree that the tariff effect is a higher price rather than a sustained higher inflation one. But that too still has to be proven. If inflation prints in…
