US Rates Watch: Inflation vs equities: 1, 2 step

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US Rates Watch: Inflation vs equities: 1, 2 step

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US Rates Watch

Inflation vs equities: 1, 2 step

What risks are underpriced? 28 May 2026

Positioning has shifted sharply over the past three months. Risk assets have rallied Rates Research

through the rate selloff even as inflation risks have built. Investors are broadly short United States

duration, with low vol and solid fundamentals supporting spread products. We stick with Meghan Swiber, CFA

that bias and are short 2y nominals (see our note: Chair lift) and long credit (see our Rates Strategist

note: Agg Alpha). BofASmeghan.swiber@bofa.com

The key risk is a mismatch—further inflation upside alongside risk asset downside. We Stephen Juneau US Economist

recommend a 1y2y inflation flattener, supported by oil risk and supply chain pressures, BofAS

and cross-market pricing. For those not hedging equity downside, we prefer simply being stephen.juneau@bofa.com

long 2y inflation. Forwards reflect a sharp retreat in inflation swaps, largely due to base Mark Capleton Rates Strategist

effects but incremental upside to oil may slow that inflection (Exhibit 1). See page 4 for MLI (UK)

trade details, pricing and risks. mark.capleton@bofa.com

Exhibit 1: 1y inflation swap and oil prices

1y inflation swap priced to decline largely due to base effects; our commodities team forecasts oil

modestly above forwards

130 4.15 CL1 Comdty BofA quarterly forecast 1y inflation swap (RHS)

110 3.55

2.95

2.35 60

40 1.75

Dec-25 Feb-26 Apr-26 Jun-26 Aug-26 Oct-26 Dec-26

Source: BofA Global Research, Bloomberg; dashed lines are projected from forward pricing

BofA GLOBAL RESEARCH

Econ forecasts for higher 1y vs 1y1y inflation

We expect headline inflation to peak at 4.6% before falling to 3% by Q1 ‘27 and then 2%