While these potential outcomes should be factored into pricing, it also means that market rates at current levels are likely too accommodative. A look at real interest rates also shows that the US 2-year real OIS rate is still at its lowest level since early June. Across the euro space, real rates have been more range-bound, although longer maturities are closer to the bottom of last year’s range.
In the end, greater uncertainty about the outlook manifested in highly inverted money market curves could have a self-fulfilling effect. If lower, more accommodative market rates persist, then central banks could be even more tempted to keep key rates unchanged for a little longer. Unless, of course, a tail risk materializes in the meantime.