RESEARCH ROUNDUP: Divergent Short-Term Outlooks for UST Yields
(Bloomberg) -- Some analysts see potential for short-term gains in U.S Treasuries based on domestic economic data trends, language in FOMC statement, short positioning and global reach for yield; others view domestic economic fundamentals and global technical trends as unfavorable, with potential for front-end yields to rise into FOMC meeting.
- Barclays (Rajiv Setia)
- Recommends going long UST 10Y as current yield levels “are not consistent with the underlying trend in the data and duration positioning has likely exacerbated the selloff”
- U.S. economy “does not seem to be accelerating,” rather “seems to be converging to the rest of the world”
- Duration positioning of major bond mutual funds at beginning of month was near high end of its range over past year; now it’s slightly shorter than average, “argues against a further large selloff”
- Also, “there’s a limit to how much term premia can rise, given subdued interest rate volatility” and fading risks of ECB tapering and Trump victory in U.S. presidential race
- BofAML (Paul Ciana)
- U.S., U.K. and German 10Y yields and JGB 30Y yield “all have technical bottom patterns in place” and “want to go higher”; MORE
- Citigroup (Ruslan Bikbov)
- Approach FOMC meeting with long-duration bias because of “high perceived likelihood of a December hike,” rise in labor force participation rate and stronger USD
- Market unlikely to price in more hawkish expectations amid election uncertainty, and Fed, if satisfied with market-implied odds, “may choose to keep the language unchanged”
- Further increases in labor force participation would boost breakeven level for payrolls (required to keep unemployment rate steady)
- Additional USD gains appear likely, with “negative effects on growth and inflation”
- JPMorgan (Jay Barry)
- Recommends adding to “trades that behave like short- duration positions, but offer more attractive relative value and less punitive negative carry,” e.g. 50:50- weighted belly-cheapening 2s7s10s butterfly
- Risks “all point to further upside” for UST yields over medium term, however “near-term technicals and valuations” are challenging
- Bearish factors include hesitancy of BOJ and ECB to “wade further into NIRP or extend QE,” USD strength that weakens foreign official demand, and improving domestic fundamentals
- Bullish offsets include positions, which “have swung sharply and are now short,” and market “pricing in 70% odds of rate hike by year-end
- Nomura (George Goncalves)
- Past week’s global rate selloff ‘‘seems much less justified by fundamental forces’’ than the increases during September driven by ‘‘BOJ steepening goals, ECB tapering concerns and discussions around fiscal stimulus”
- Global duration grab that picked up early this year and extended after Brexit “could potentially fuel a third round of selling as real money either looks to liquidate or hedge
- Soc Gen (Subadra Rajappa)
- Front-end yields should rise further and curve should flatten into Dec. 14 FOMC meeting, assuming outcome of presidential election isn’t a surprise; MORE
- TD (Priya Misra)
- Looking to re-set UST 10Y long as ‘‘the global reach for yield is still far from over”
- Selloff in global rates has been led by gilts and bunds, “not by a considerable re-pricing” of December Fed rate hike odds which remain near 70%; MORE
Alert:
HALISTER1Source: BFW (Bloomberg First Word)
People Rajiv Setia (Barclays PLC)
George Goncalves (Nomura Holdings Inc)
Jay Barry (JPMorgan Chase & Co)
Paul Ciana (Bank of America Corp)
Priya Misra (TD Securities USA LLC)
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