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The Inflection Point For Interest Rates�

Using extreme precision to identify asymmetric opportunities

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CapitalFlowsResearch.com

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Where are we?

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How does all of this work?

  • Interest rates are about: Fed Funds, expected short rate, and term premia
  • Short Rate: Fed Funds
  • Expected Short Rate: FF/SOFR contracts
  • Rates across the curve taking on more duration risk: 5Y, 10Y, 20Y and 30Y

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Beginning of a cutting cycle:

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Inflation is trending down:

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Main Idea For Inflation:

  • Speed of deceleration = WHEN we get to 2% = HOW FAST interest rates move down

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Flexible vs Sticky Atlanta Inflation Data:

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CPI Sticky Components excluding Shelter:

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Main Idea For Inflation:

  • Speed of deceleration = WHEN we get to 2% = HOW FAST interest rates move down

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This dispersion in CPI determines HOW fast the Fed cuts vs pauses:

The forward curve: Z5 pricing 3.850% which means around 70bps of cuts over the next 9 meetings. This is would assume 3 cuts and 6 pauses (assuming 25bps).

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How much can they pause vs cut?

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Economic Growth:

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Tensions:

  • Higher R-Star in the economy
  • Don’t have the inflationary pressures of 2021/2022 or level of growth seen in 2023
  • The Fed is a political institution

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All taking place as valuation multiples in equities have pushed back to 2021 levels:

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Main Things Framing The Risk-Reward:

  • 1) We are in a cutting cycle where the oscillations in rates are primarily going to be from the speed at which rate cuts occur.

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Main Things Framing The Risk-Reward:

  • 2) The curve has uninverted which allows more support for duration

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Main Things Framing The Risk-Reward:

  • 3) Pricing an extreme right now with very few cuts on the forward curve

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Even fewer cuts in Z5Z6 Spread

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Key Takeaways:

  • We are in a cutting cycle where the oscillations in rates are primarily going to be from the speed at which rate cuts occur.
  • The curve has uninverted which allows more support for duration
  • Pricing an extreme right now with very few cuts on the forward curve
  • Short term risk in inflation and overall resilience in growth

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All of the interest rate research can be found at CapitalFlowsResearch.com