Bond Sell-Off to Fade as Fiscal Spillover ‘Tenuous at Best’: CA
(Bloomberg) -- Fiscal expansion has historically steepened 5s30s by 17bp with every 1% increase in the deficit, but relationship with level of rates is unclear; macro factors likely to offset stimulus, limit selloff, CA strategist Mohit Kumar writes in note.
- Even though the U.S. is near full employment, macro structural factors limiting inflation still persist, such as skills gap in job creation with worse wage inflation prospects
- Low rates have forced near-retirement laborers to postpone consumption or work longer, both deflationary in nature
- Technology replacing traditional services also deflationary
- Sustained rates sell-off can be “self-defeating” given negative impact to risky assets, making equity risk premium more expensive and raising valuation concerns
- Credit investors deemed “financial tourists,” first to exit in bond sell-off
- U.S. positioning appears stretched, UST valuations no longer rich
- Trade strategies: likes long positions in front end of EUR curve, where rate hike is priced in by mid-2018, but unlikely as QE should still be ongoing
- Buy 7Y-8Y sector in Germany, 5Y-7Y sector in U.S. if looking to fade selloff
- Maintains short position in Italy with growing investor concerns ahead of referendum
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HALISTER1Source: BFW (Bloomberg First Word)
People Mohit Kumar (Credit Agricole SA)
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