Halister News

Economic Release Details: {CPMINDX Index ECOD}

Economic Release Details: {JNIPMOM Index ECOD} --GEAROID REIDY

(Bloomberg) -- Fed is setting the stage for a 5s30s Treasury curve steepener with balance-sheet normalization starting “relatively soon” and with federal funds rate not having to rise much further to a neutral policy stance, under the assumption that real neutral rate will remain around zero.

• The prospect of a higher terminal rate is now dependent on fiscal policy; it has been falling, implying lower policy rates, with the Fed acknowledging persistently subdued inflation dynamics (“below” instead of “somewhat below” its 2% target) with core PCE currently at 1.4%
• Fed rate-hike expectations have also been diminishing given the primary focus of initiating balance-sheet normalization, with odds of an increase in December now priced at less than 40%
• U.S. breakevens are staging a tactical rally with the move higher in energy prices/industrial metals and fall in the dollar; however, scope for a sustained move higher remains limited in the face of central bank balance-sheet reduction, declining survey-based expectations and secular disinflation trends
• Once balance-sheet reduction starts, increases in fed funds rate -- which “would not have to rise all that much further to get to a neutral policy stance,” in Yellen’s own words -- may be deferred
• Given the historically low levels of implied volatility, the binary nature of the outlook and balance sheet/fed funds interaction, 5s30s curve spreads maybe favored besides outright UST steepeners; for example, a 1-year 5s30s single-look spread cap is indicatively priced at 14c
• NOTE: Tanvir Sandhu is an interest- rate and derivatives strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice

To contact the reporter on this story: Tanvir Sandhu in London at tsandhu17@bloomberg.net To contact the editors responsible for this story: Neil Chatterjee at nchatterjee1@bloomberg.net Anil Varma