Halister News

--JOSHUA FINEMAN

--ALAN CRAWFORD

(Bloomberg) -- Instead of indicating a “small probability” of a rate cut, inversion in fed funds curve may reflect “technical aspects” of money markets, Credit Suisse strategists Praveen Korapaty, William Marshall and Jonathan Cohn write in note.

• Since final reforms to money fund industry go into effect Oct. 14, expectation of a “flood of cash” into govt funds from prime funds would cause a drop in funding costs for GC
  • This decline combined with post-referendum demand may have caused the inversion
• O/N GC repo is also elevated as a result of “typical quarter-end squeeze” on dealer balance sheets and increased demand for funding long UST positions after Brexit vote
• Should be “some degree of normalization” after June 30, though GC repo may settle in 55-60bp range, above pre-Brexit 42bp
  • “That is, over the next month or two, there’s likely to be a ~15bp additional premium built into secured funding markets”
• Markets only pricing about 45% of a hike by end-2017, an “underpricing of the probability of tightening”
  • Case for rate cuts is weak “without significant deterioration of data”
  • CS stopped out of EDU6/EDU7 steepener trade; wait for positive catalysts before reentering
• Related story: Fed Fund Futures Pricing Static Monetary Policy, Not Rate Cuts
• Related story: Crane’s MF Symposium: ‘Where Does the Money Go?’: JPM’s Roever

--Washington Newsroom (202) 624-1820

(Bloomberg) -- Firm’s end-2016 forecast for UST 10Y yield of 2% “is unlikely to be achieved” amid fallout from Brexit vote, Credit Suisse strategists led by Praveen Korapaty say in note.

• Decision on how much to lower yield forecasts will depend on forthcoming U.S. economic data, especially June employment report
• Weaker data, “combined with negative external shocks,” could drive 10Y yield as low as 1.1%; however, this is “not our base case”
• USTs should benefit disproportionately from safe haven flows because of their higher yields
• UST 10/30 spread is about 10bp too steep as risk-asset selloff should create long-duration demand
• CS also expects euro-zone peripheral spreads to widen; switching U.S.-Germany tightener to U.S.-Spain tightener