Halister News

(Bloomberg) -- There’s “some steepening bias” for the Treasury curve during the futures roll, since a potential Fed balance sheet announcement would overlap with the delivery window for the September contract, Credit Suisse strategist Jonathan Cohn wrote; CS expects 10Y yield to move 10-15bp in the week following a Fed announcement.

• Debt ceiling may also factor into the U7/Z7 roll cycle, since the repo curve can flatten “and even invert” as Treasury’s drop- dead date nears; this would eat into shorts’ carry “and give the calendar roll a mild bullish bias”
• Bearish TUU7/TUZ7; longs should roll early
  • Asset managers’ net long has expanded, currently 1.5 std deviations above its 3yr avg
  • Calendar roll is trading “modestly rich” to CS model, which points to a bearish bias
• Bearish FVU7/FVZ7; longs should roll early
  • Asset managers’ net long appears to be “primary motivating factor” for the roll, given “relatively little bias” from other valuation metrics
  • Calendar roll “modestly cheap” to model due to FVZ7 “appearing relatively rich”
• Neutral TYU7/TYZ7
  • Asset managers’ net long “moderately below” the 3yr avg and appears “unlikely to impart a directional bias”
  • Negative net basis in TYU7 not large enough to “warrant outright bearishness”
• Bullish UXYU7/UXYZ7; longs should roll late
  • Asset managers’ net short about 1 std deviation below the avg, suggesting bullish bias
  • “There’s little else in the way of metrics to bias the roll in either direction”
• Neutral USU7/USZ7
  • Front contract’s positive net basis only half-a-tick and unlikely to have a “material impact on the calendar roll”
  • “Remote chance” that cheapest-to-deliver switches in the contracts to 4% May-37 from 4.5% Feb-36; “such a switch, at least in the front contract, would require a sharp selloff in rates”
• Bearish WNU7/WNZ7; longs should roll early
  • Expect “extremely large” asset manager long base “will dominate other supportive metrics”

To contact the reporter on this story: Alexandra Harris in New York at aharris48@bloomberg.net To contact the editors responsible for this story: Boris Korby at bkorby1@bloomberg.net Greg Chang

--ELIZABETH FOURNIER

(Bloomberg) -- Near-term positioning views on USTs take into account potential for slowing inflation, fiscal policy stagnation and geopolitical risk to contain long-end yields; risks include strong July retail sales data and potential for a risk-asset selloff, valuation driven or otherwise.

• Citi (Strategists led by Jabaz Mathai, Aug. 11 note)
  • Weak inflation readings “validate our core thesis for lower rates”; medium term trends still bullish, but receding of geopolitical worries could cheapen USTs a bit
  • FOMC “is making a slow turn in its understanding of inflation dynamics” toward accepting longer-term trends weighing on inflation
  • The market “is already doing the work for the Fed by pushing rate hikes further and further out,” however “there is significant room to rally in the intermediate sector of the curve”
• Deutsche Bank (Strategists led by Aleksandar Kocic, Aug. 11 note)
  • Higher yields, steeper curve remain core view, yet it’s “increasingly difficult to hold with strong conviction” after latest CPI data
  • Collapse in 10Y yields this year “probably reflects firstly the fading optimism of a big budget plan and higher debt issuance, with tamer expectation of the Fed’s path of hiking playing a secondary role”
• Barclays (Strategists led by Rajiv Setia, Aug. 10 note)
  • 2s10s flattener “continues to offer an attractive risk-reward” amid rising geopolitical uncertainty
  • Absent “a clear turn toward easier fiscal policy, long-end yields should not rise much, but front- end yields could still reprice modestly higher” aided by debt limit if money funds avoid T-bills
• Morgan Stanley (Strategists led by Matthew Hornbach, Aug. 11 note)
  • Stay overweight 5Y point on curve vs 2s and 30s “given its superior carry and expected- rolldown, positive convexity to flight-to-quality events that could tighten financial conditions and lead to a Fed on-hold, and cheapness relative to the current expected pace of rate hikes”
  • Risks to 5Y include: strong retail sales, FOMC minutes that “make it appear as if September is not a slam dunk”
• Nomura (Strategists led by George Goncalves, Aug. 11 note)
  • Bearish call for rates to rise into 4Q (based on Fed balance-sheet unwind, ECB taper and inflation rebound) faces risks including risk- asset selloff from “grossly overvalued” levels

--With assistance from Elizabeth Stanton. To contact the reporter on this story: Anna Windemuth in New York at awindemuth1@bloomberg.net To contact the editors responsible for this story: Boris Korby at bkorby1@bloomberg.net Elizabeth Stanton