Halister News

(Bloomberg) -- The start of the unwind of deep pessimism priced in rates as Trump trades re-emerge faces political risks to hedge while the broad global recovery continues.

• End of the business-cycle pricing in rates had become too comfortable and start of tangible details of tax plan last week has added to the perception of increased odds of expansionary fiscal policy
• 4Q can see Treasury 10-year yields take out the post-Trump election highs and push up U.S. rates volatility, which would be a catalyst for cross-asset vol given markets have become increasingly correlated to U.S. rates (allowing for dispersion ideas across e.g., bunds, U.S. financials, gold, JPY and MXN)
• There are a number of permutations on tax reform that will likely lead to a bumpy 4Q with large disagreements within Trump’s party, tax plan potentially needing be scaled down to meet fiscal constraints in Congress, as well as the risk of it not getting done
• North Korea crisis pricing post headlines has typically faded, but recently there have been signs of more sustained pricing with USD/KRW skew remaining sticky near 2013 highs and 5-year CDS at 75bps (88th percentile of 5-year range) as tensions rise; however, the FX vol curve shows no sign of inversion yet and equity vol is depressed
• NOTE: The binary nature of tax reform getting done by year-end suggests U.S. rate vol remains too low. Two-way risk stems from deficit-financed UST-negative outcome or progress stalling, see more here
• NOTE: USD rates payer skew remains flat and is contingent on the progress of U.S. tax overhaul to richen, see more here
• NOTE: Risk-off option structures on gold that have low premiums and high convexity exposure may be attractive as defensive hedges; see more here, including example structures
• NOTE: Tanvir Sandhu is an interest-rate and derivatives strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice

To contact the reporter on this story: Tanvir Sandhu in London at tsandhu17@bloomberg.net To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net Keith Jenkins, Anil Varma

Economic Release Details: {CPMINDX Index ECOD} --JANET ONG