RESEARCH ROUNDUP: Lower UST Yields May Follow ECB Meeting
Source: BFW (Bloomberg First Word)
Tickers
2539Z GR (European Central Bank)
People
Michael Pond (Barclays PLC)
Rajiv Setia (Barclays PLC)
Aaron Kohli (Bank of Montreal)
Alex Li (Deutsche Bank AG)
Bruno Braizinha (Societe Generale SA)
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UUID: 7947283
(Bloomberg) -- Near-term outlook for UST yields hinges on outcome of Oct. 20 ECB meeting seen as likely to support flatter curves, strategists say; Fed view and U.S. elections may help flatten curve, provided Fed doesn’t take balance-sheet measures to steepen it.
Alert: HALISTER1- Barclays (Rajiv Setia, Michael Pond)
- With Trump fading in polls, “a large further rise in term premia is now less likely”
- Recommend buying 6m30y receiver spreads funded by selling a high-strike payer while remaining neutral on outright duration; also, stay long UST 5Y vs. U.K. 5Y “to express a bullish view on US rates”
- BofAML (Ralf Preusser)
- Oct. 20 ECB meeting poses risk to positioning for higher EU rates; MORE
- BMO (Aaron Kohli)
- Oct. 20 ECB statement is likely to indicate “that the program is not close to winding down”
- This “should come as a relief to markets,” and “we like a 5s30s flattener as a knee-jerk reaction to any dovish comments from Draghi, who we expect to reassure markets that tapering is not imminent”
- BNP (Laurence Mutkin)
- Global yields face upside risk from “suppressed” term premia, low real yields and rising oil price, however catalyst for rise in term premia is lacking, especially if Draghi quashes taper talk at Oct. 20 ECB meeting
- In USTs, “wait for a move lower” in 10Y yields to reinitiate short outright positions around 1.70%, targeting 1.95%; MORE
- Citigroup (Jabaz Mathai)
- Oct. 20 ECB meeting “poses bearish steepening risks, but longer term fundamentals favor long positions”
- Assuming steady-state U.S. growth “is roughly equal to the current pace,” then current term structure is “close to neutral” and meaningful deviations are “unlikely to persist”
- Potential for hawkish ECB is near-term risk for USTs, however if it brings no further damage to EGBs, “we see the potential for a decent rally in USTs,” as yield levels in long end “prove too attractive to pass up”
- Deutsche Bank (Dominic Konstam, Alex Li, Steven Zeng)
- Expect higher, steeper yield curve in response to “subtle shifts in central bank policies” and ongoing normalization of term premium
- 10Y yield has scope to 2%, 5s30s to 140bp
- Change in Fed’s balance sheet composition, in “extreme case” that shortened avg maturity by 3 yrs, could steepen 5s30s by ~50bp
- JPMorgan (Jay Barry)
- Move to higher yields over past 2 wks “has clearly been a global story” led by U.K. amid GBP selloff
- Heavy long-end supply ahead and skepticism about “efficacy of nontraditional monetary policy” are among other drivers
- Rise in yields “may slow in coming weeks,” however
- Valuations “no longer appear expensive” relative to Fed outlook and large speculative short base in futures (esp. ED and WN); U.S. presidential/congressional election outcomes also have potential to bring about lower yields
- Curve flatteners offer more value than duration stance; Fed tightening in December should flatten 5s30s, which “has not appeared this steep relative to its drivers since the bund-led selloff of mid-2015”
- Morgan Stanley (Matthew Hornbach)
- Stay short 10Y gilts and 10Y bunds vs USTs
- Fade any price action suggestive of Fed action to steepen the yield curve; “the idea of steepening the Treasury curve in order to scrape froth off the commercial real estate market is not one the FOMC will take seriously”
- Nomura (George Goncalves)
- UST 10Y yield unlikely to sustain a move above 2% for array of reasons including slow growth, low terminal fed funds rate and high correlation among G4 rates: MORE
- Soc Gen (Bruno Braizinha, Subadra Rajappa, Shakeeb Hulikatti)
- Minutes of Sept. 21 FOMC meeting “left the door wide open for a December rate hike,” and expectations for retail sales and CPI releases are “slightly biased for positive surprises”
- These support “a moderate bearish bias,” however yields in belly of curve appear “toppish”
- They recommend moving short positions from 5Y to 2Y sector “to position for a shift in momentum as the market moves to price the December hike fully”
- U.S. elections event risk includes prospect of Democratic control of White House and Congress; “would be structurally bearish” for USTs based on expected “rotation from monetary towards fiscal policy”
- TD Securities (Priya Misra, Gennadiy Goldberg, Cheng Chen)
- Fade recent increase in UST yields outright (remain long 10Y at 1.73%, near top of range) and vs bunds (spread near all-time highs, bunds vulnerable to ECB operational changes in QE)
- Monetary policy “is clearly at its limits,” and global fiscal stimulus “doesn’t look likely either”
- They also recommend 5Y TIPS on breakeven for rise in CPI rate and central banks “expressly open to overshooting their inflation targets” (including Yellen on Oct. 14)
Source: BFW (Bloomberg First Word)
Tickers
2539Z GR (European Central Bank)
People
Michael Pond (Barclays PLC)
Rajiv Setia (Barclays PLC)
Aaron Kohli (Bank of Montreal)
Alex Li (Deutsche Bank AG)
Bruno Braizinha (Societe Generale SA)
To de-activate this alert, click here
UUID: 7947283