Ex-Energy CPI Swaps can go Lower: US Rates Strategy | North America

Research evidence excerpt

Ex-Energy CPI Swaps can go Lower: US Rates Strategy | North America

Idea

July 17, 2026 09:00 AM GMT

Morgan Stanley & Co. LLCMUS Rates Strategy | North America Aryaman Singh

Strategist

Ex-Energy CPI Swaps can go Aryaman@morganstanley.comMatthew Hornbach +1 212 761-1993

Matthew.Hornbach@morganstanley.com +1 212 761-1837

Lower Shaun Zhou

Shaun.Zhou@morganstanley.com +1 212 761-3348

1y CPI swap is optically low because of base effects; 1y1y Martin W Tobias, CFA

forwards and core CPI fixings remain elevated. As inflation keeps StrategistMartin.Tobias@morganstanley.com +1 212 761-6076

surprising lower with no second-order conflict effects yet, ex- Eli P Carter

energy CPI swaps can move lower and take Fed policy trough StrategistEli.Carter@morganstanley.com +1 212 761-4703

rate down. Maintain 10y TIPS with payer protection.

Key Takeaways

1-year CPI swap below 2% signals no inflationary concerns at face value but it is

distorted by base effects from high May 2026 CPI print because of oil prices.

In contrast, 1y1y CPI swap forwards is at 2.6% and 2y3y at 2.5%. Core CPI fixings

in the range of 2.6% to 2.8% remain elevated vs our economists' estimates.

After the print, only the June CPI fixing moved lower while later months were

broadly unchanged, suggesting investors kept inflation path unchanged.

June CPI was soft across the board, with even supercore ex-airfares and hotels

normalising on a Y/Y basis, showing the weakness went beyond volatile items.

We maintain long 10-year TIPS partial hedged with 1m10y payer swaption. We

raise the stop by 5bp to 2.40%, and note the hedge is in the money, up ~40%.

The 2026 Extel Global Fixed Income Poll is now open and your participation

matters a great deal to us. If you have found our research helpful, we would greatly