RESEARCH ROUNDUP: Lower UST Yields, Flatter Curve Expected
(Bloomberg) -- Strategists see potential for UST 10Y yield to fall further, possibly reaching 1%, amid global recession signs and/or demand for duration; also for rally to stall as it prices in more central bank easing globally than is likely to occur.
- Barclays (strategists led by Rajiv Setia)
- Global yields should “persist at low levels” across major sovereign markets; however, 3Q could be an inflection point
- On signs global business cycle is stalling, long USTs have room “for a large rally,” favoring medium-term recession hedges such as low-strike calendar spread receivers; UST 10Y yield “could easily breach 1% in a global recession”
- Alternatively, prospect of more rate hikes in this business cycle “would drive short rates primarily,” favoring front-end payer spreads
- End-2016 UST 10Y yield forecast lowered to 1.55% from 2%
- BofAML (strategists led by Shyam Rajan)
- U.S. data “remain a sideshow” for U.S. rates amid “nonstop appetite for duration”
- There are “early signs of Japanese investors extending out the curve,” including timezone analysis showing 5s30s flattening in each overnight session over past week
- While too early to fade richness of 10s, “we would look for any continued shift out the curve by the Japanese investor base for further conviction”
- BMO (Aaron Kohli)
- 10yr should underperform 5s and bonds “as liquidity premium drops and the market returns to more normal functioning,” eroding profits on swaps fly
- 10s are in downward sloping channel with technical support around 1.30%; “gives us greater confidence that we are likely to see either a sideways drift or even a selloff into 1.50% in the coming days,” and underperform on curve as “the bond may not follow”
- Credit Suisse
- End-2016 10Y yield forecast lowered to 1.40% from 2%, with 1.2% expected during 3Q; MORE
- Citi (strategists led by Jabaz Mathai)
- U.S. rates look rich to dividend yields; however, “a hard floor for rates cannot be derived from this” because internationally, the gaps (equity ex-financials dividend yield vs 10Y sovereign yield) “are significantly wider”
- Likewise, co-existence of low IG spreads and low UST yields “is a function of QE-driven central bank policies that get exported across borders”
- UST curve spreads have scope to flatten further as 30Y “continues to look attractive to non-U.S. investors”
- Deutsche Bank (strategists led by Dominic Konstam)
- Low real yields “are critically important to protect risk asset valuation and aggregate demand” because of sagging labor productivity that squeezes profits
- Real yields have lagged rally in nominals this year, collapsing breakevens
- This suggests either that breakevens are now driving Fed’s policy stance (vs being driven by it), or that Fed has lost control of breakevens, making level of real yields “even more important in protecting risk asset valuations and supporting demand”
- JPMorgan (strategist led by Jay Barry)
- Bull flattening of UST curve, reflecting uncertainty over Brexit implications, “comes amid what appears to be a resilient domestic economy” evidenced by strong June employment data
- “For the foreseeable future, GBP/USD is likely to remain a barometer of risk aversion and a large driver of Treasury yields,” and global policy response “leaves a risk toward lower yields in the coming weeks”
- Still, duration longs should be treated “with an abundance of caution” because carry is below avg over past yr and main position indicators are at longer end of range
- Long end of curve “has run ahead of its fundamental drivers,” with 10s30s more than 10bp too flat; demand from LDI among likely drivers
- Morgan Stanley (strategists led by Matthew Hornbach)
- Firm turns neutral from bullish on G4 bonds with yields at all-time lows
- “Near-term central bank easing we expect is mostly priced, as is some easing we don’t expect immediately”
- While momentum to lower yields “remains supportive,” stock market gains and poor vol-adjusted carry are curbing “prospect for positive excess returns” in near future
- TD (strategists led by Priya Misra)
- Buy U.S.-U.K. 10Y spread at 70bp-75bp as “we expect gilts to run out of steam at some point” in the next month
- U.S.-German 10Y spread has scope to 140bp; since end of Fed QE, it’s been as low as 125bp in early 2015 as ECB QE was being priced in
- Wells Fargo (Michael Schumacher, Boris Rjavinski)
- “Mega-rally” for UST and other high-quality govt bonds “is about done”; however, “ongoing reach for yield probably will limit potential yield increases”
- 3s10s can flatten “for several more months, even if the Fed is quiet”; as a result of Brexit, “investors who thought/hoped they would be able to buy bonds in a back- up now may feel compelled to buy”
Alert:
HALISTER1Source: BFW (Bloomberg First Word)
People Rajiv Setia (Barclays PLC)
Aaron Kohli (Bank of Montreal)
Boris Rjavinski (Wells Fargo & Co)
Dominic Konstam (Deutsche Bank AG)
Jabaz Mathai (Citigroup Inc)
To de-activate this alert, click
hereUUID: 7947283