Halister News

(Bloomberg) -- Positioning views on U.S. rates are broadly divided between bets on higher yields based on economic data, Fed and supply (JPMorgan, TD, Soc Gen) and bets on lower yields based on expected repricing lower of Fed’s terminal rate (Citi, Deutsche Bank).

• JPMorgan (strategists led by Jay Barry)
  • UST yields should rise in coming weeks as “data point to better growth” in 2Q, yields have consistently risen ahead of FOMC’s quarterly SEP updates, and they face bearish supply dynamics with 2Y and 10Y notes both slated to be offered on June 12
  • Holding short duration positions beyond short-term “will be challenging,” however
    • Market is unlikely to upgrade odds of September rate hike over near-term amid slowing core inflation
    • SOMA normalization policy announcement unlikely before December
    • Debt ceiling and government funding debates will return to forefront over next 2-3 months
• TD (strategists led by Priya Misra)
  • Drop in UST yields since March FOMC meeting despite steady expectations for Fed rate increases reflects “pricing out of the Trump stimulus”
  • Expectations of fiscal stimulus ought to have increased inflation expectations, and expectations of more UST supply should have increased term premium, which has declined to levels last seen shortly after U.S. Election Day
  • 10y term premium “should be biased higher,” though Comey testimony on June 8 carries binary risk
• Soc Gen (strategists led by Subadra Rajappa)
  • End-2017 forecast for UST 10Y yield lowered to 2.70% from 2.90% based on lower expectations for tax cuts and other pro-growth policies, slowdown in core inflation and market-implied skepticism that Fed can raise rates more than once next year
  • Still expect “modest rise” in yields this year, driven by possibility of Fed rate hikes, balance sheet normalization and potential for ECB tapering; recommends neutral duration stance near-term, bearish tilt medium-term
• Citi (Jabaz Mathai)
  • Market “has priced out fiscal stimulus both in the front end” via flatter Eurodollar curves “and in the back end,” where 10Y and 30Y yields imply “almost no change in deficits”
  • Expectations for rate hikes “will continue to move further away” from Fed’s forecasts, repricing terminal rate to as low as 1.5% (vs 1.65% currently and 3% Fed forecast)
  • If Fed “is done for now” after June hike, balance sheet adjustment should be on low end of expectations, with reductions capped at $200b in 2018
  • With inflation “relentlessly running below the Fed’s goal,” grab for duration “will overcome supply effects, keeping long-end rates in check”
• Deutsche Bank (strategists led by Stuart Sparks)
  • Soft May jobs report suggests term premium normalization will occur slowly and market may price in a lower terminal rate, favoring 5s on the curve
  • 10s30s curve appears “excessively flat, even given generally depressed levels” of U.S. term premium; favor steepeners at long end, outright and vs Germany in box trade structures
• BofA (Shyam Rajan and Carol Zhang)
  • BofA last week maintained 2.85% end-2017 forecast for UST 10Y, while lowering forecasts for 2Q and 3Q based on fading optimism about Trump administration legislative agenda
  • Front end “offers zero value to longs unless one believes in rate cuts,” however, and alternatives “are getting very attractive” for unlevered buyers
    • Alternatives include IOER for domestic banks, Fed’s reserve repo pool for reserve managers and 1Y UST bills for mutual funds
  • As a hedge, recommend straddles on the curve, as curve vol “has consistently picked up relative to rates in both 2s10s and 5s30s” in the two recessions since 2000

To contact the reporter on this story: Elizabeth Stanton in New York at estanton@bloomberg.net To contact the editors responsible for this story: Boris Korby at bkorby1@bloomberg.net Elizabeth Stanton, Greg Chang