RESEARCH ROUNDUP: Analysts Biased Toward Long USD Rates Duration
(Bloomberg) -- Analysts are mostly bullish on U.S. rates duration given the global rates rally, U.K. EU referendum risks and poor economic data, with the outlier being JPMorgan, who recommends selling 5Y notes.
- Barclays (strategists including Rajiv Setia)
- Market reaction to FOMC meeting will depend on how Fed balances between maintaining tightening bias versus being responsive to the latest payrolls report
- See risk of Fed’s reaction function being seen as having too much of a tightening bias, would lead to further flattening of the curve
- Recommends 2s10s UST curve flatteners as a tactical trade going into FOMC rate decision
- In conditional space, recommend buying ATM, ATM-15bps receiver spreads on 3m30y tails funded via selling low strike (ATM-20bp) 3m3y receivers; see top-left vols as rich, scope for bull-steepening is limited
- BofAML (strategists including Shyam Rajan)
- Central theme of flatter curves, USTs benefiting from global flows is here to stay
- Interest rate/equity disconnects are not a good enough reason to expect higher rates; perception of Fed matters for distribution of rally between reals and breakevens
- Position for a summer unwind of the crowded reflation trades using conditional bull flatteners: MORE
- FOMC unlikely to provide hint about rate hike timing: MORE
- Citigroup (strategists including Jabaz Mathai)
- Despite upcoming FOMC and tier-one data, EU referendum will be primary driver of price action and will continue to push yields lower
- Maintain view that a return to 1.50% in 10Y yields is increasingly probable, strong global duration demand remains
- Risks to front-end spreads skewed toward widening, given the recent USD weakness against EM currencies, uncertainty about U.K. referendum, MMF reform; recommend buying 3Y spreads
- Downward pressure on repo of o/n GC rates a result of dealers holding less collateral, large SOMA rollovers, unwillingness to take duration risk; expect downward pressure on GCF repo rates to dissipate
- Deutsche Bank (strategists including Dominic Konstam)
- Weak May jobs report leaves two scenarios; endogenous labor market slowdown, as companies attempt to restore profits with slower hiring or layoffs; Fed would have to reverse course, return to easing mode
- Alternatively, as job growth slows, output growth will occur via gains in productivity, allowing the Fed to raise rates very gradually
- 10Y UST should stay anchored around 1.75%, with risks to the downside; breakevens should be biased higher, real rates static to substantially lower
- JPMorgan (strategists including Alex Roever)
- Significant event risk over near term, but Treasuries appear rich after adjusting for the market’s Fed expectations, European bond yields
- Decline in carry suggests yields should reverse higher over the near term; recommends selling 5Y USTs
- Morgan Stanley (strategists including Matthew Hornbach)
- Bond market indicators turn bullish on USTs; still retain early March call that 2016 will become known as the “Year of the Bull” in G4 rates markets
- Sentiment among leveraged funds remains marginally bearish on the bond market, shorts concentrated in Eurodollars
- Expect more dovish dot-plot from FOMC participants, see more room for sentiment to become less bearish, especially in Eurodollars
- Covering short positions in the coming weeks should see 5Y Treasuries outperform both outright, on the curve; maintain long 5Y UST on 2s5s30s butterfly, add outright long in 5Y notes at 1.17%
Alert:
HALISTER1Source: BFW (Bloomberg First Word)
People Rajiv Setia (Barclays PLC)
Alex Roever (Bear Stearns & Co Inc)
Dominic Konstam (Deutsche Bank AG)
Jabaz Mathai (Citigroup Inc)
Matthew Hornbach (Morgan Stanley)
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