​Macro Outweighing Structural Drivers In Long-Term U.S. Rates Skew Inversion

The inverted skew in both short-term and long-term U.S. rates expiries are being more so driven by fears that the U.S. Federal Reserve will continue to pursue its rate hike policy in 2016, as opposed to the structural impact on skew coming from vol buying from fixed income exotic desks to hedge long-dated callable bonds. Currently, skew is pricing in a potential negative growth shock or policy mistake from the Fed, with no hikes expected for at least 18 months if you take historical trends of long-dated skew inversion into consideration. However, should the Fed use recent positive inflation and labour market data to justify another rate hike, skew in short-term and long-term rates expiries could invert further.