RESEARCH ROUNDUP: USD 10Y Rate Has Scope to 3%
(Bloomberg) -- Forecasts for higher yields are based on fiscal policy and Fed outlooks and correlation breakdown with USD; Barclays has outlier forecast, recommends going long UST 10Y.
- Deutsche Bank (strategists led by Dominic Konstam)
- Expects higher yields and steeper curve out to 5Y; Fed will exercise caution but is “unlikely prematurely to remove optionality,” may appear to be behind the curve
- Successful fiscal policy implementation can push 10Y yields above 3%
- Correlation of rates with USD should break down and reverse, meaning higher yields accompanied by weaker dollar, “a double glow for reserve-driven Treasury buying longer term”
- BofA (strategists including Shyam Rajan)
- 10Y yield will touch 3% by mid-year, level off toward year-end
- Drivers will include: markets not pricing in enough Fed action, term premium too low relative to previous tax cut episodes, reflation in Europe and Japan, and asset manager long positioning; MORE
- Nomura (strategists including George Goncalves)
- 5s30s curve has scope to steepen to 125bp, “given its persistent flatness” ahead of Treasury refunding announcement and fiscal reflation backdrop
- Also, any rebound in foreign demand Treasuries based on weaker USD should to benefit belly-to-intermediate part of the curve
- 5s10s30s fly is “quite cheap vs the level of rates” especially if Fed raises rates more than twice
- Morgan Stanley (strategists led by Matthew Hornbach)
- Bond market indicators “have turned uniformly negative” across G4 rates markets and correlations between stocks and 10y government bond yields have risen; investors should scale into 5s30s steepeners over coming week
- MS forecast for January nonfarm payroll change is +205k; this would likely flatten 5s30s curve, creating opportunity to enter steepeners
- Discouraging inflation prints should follow, pulling market-implied odds of a Fed rate increase in March back to zero and steepening the curve
- TD Securities (strategists including Priya Misra)
- Gains for U.S. stocks should drive variable-annuity paying flows in the long end; MORE
- Paying needs should decrease over time as the option embedded in the VA moves further from the strike; recent move provides an attractive level to put on 5s30s spread curve flatteners for a medium-term trade
- Forthcoming changes to Bloomberg Barclays indexes should be mildly supportive for Treasuries as their weight in the index increases
- Barclays (strategists including Rajiv Setia)
- Recommends going long UST 10Y at 2.52% “tactically” as policy uncertainty remains elevated
- Rationale includes complacency in markets given the range of outcomes amid policy uncertainty, while medium/long-term Fed expectations and term premia should be contained; MORE
- In relative value arena, they recommend selling 8.875% due 2/15/19 vs TUH7 contract (DV01 neutral) as the former looks excessively rich, the latter relatively cheap
- Review of 2016 Treasury auction performance reveals improvement in 30y auctions reflective of larger setup
- Performance of Bond/Ultra Bond futures steepeners into the auctions was better than in 2015, particularly around refunding supply
- SocGen (strategists including Vincent Chaigneau)
- Risks are tilted towards a more hawkish Fed this week, however it will stop short of guiding markets towards a rate hike at the March meeting
- Recommend positioning for this scenario via whites/greens eurodollar steepeners or 3-month forward 2s10s bear flatteners; maintain a bearish bias on U.S. rates and expect term premiums to continue to rise
- Recent Fed talk has focused on the balance sheet, timing of stopping reinvestment proceeds; such action would accelerate the normalization of the term premia at the back end
Alert:
HALISTER1Source: BFW (Bloomberg First Word)
People Dominic Konstam (Deutsche Bank AG)
George Goncalves (Nomura Holdings Inc)
Matthew Hornbach (Morgan Stanley)
Priya Misra (TD Securities USA LLC)
Rajiv Setia (Barclays PLC)
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