Halister News

(Bloomberg) -- Nomura strategists Penglu Zhao and Stanley Sun issue views on Treasury futures calendar roll.

• NOTE: First notice for June Treasury futures complex is May 31
• Bullish TUM7/TUU7; shorts should roll early
  • TUM7 cheapest-to- deliver has been trading cheaper than TUU7 CTD, so any valuation adjustment in front contract may help widen the roll
  • Other reportable positions have “elevated” net shorts (-12%), which may also put widening pressure on the roll
• Bearish FVM7/FVU7; longs should roll early
  • FV contract has “some negative basis,” which may lead to some tightening pressure on the roll
  • Asset managers remain “dominant players” in the contract, even though record net longs have declined into May
• “Mildly” bullish TYM7/TYU7; shorts should roll early
  • Since the belly of the curve is likely to remain range-bound, it’s expected the micro curve may have “a more mean-reverting pattern rather than any directional shift”
  • The strong correlation between positioning by non-reportables and TY pricing may put widening pressure on the calendar spread as shorts are rolled
• “Mildly” bullish UXYM7/UXYU7; shorts should roll early
  • RV curve valuations may be the main driver; Feb-27 Treasury likely to cheapen vs Nov-26 security as liquidity premium wanes
  • Trend expected to continue into the roll, which may cheapen the UXYU7
• Neutral USM7/USU7
  • USM7, USU7 share same CTD; in previous roll cycles when both contracts shared a CTD, “calendar roll fluctuations were limited to a very tight range”
  • Asset managers still have largest net long positions, “despite some reduction in recent months”
• Neutral WNM7/WNU7
  • Although asset managers still hold record net longs and they’re “dominant players in the market,” their activities may not have a “meaningful impact on the roll at this time”
  • Both contracts have equal delivery probabilities split between Aug-43 and Nov-43 Treasuries, yet the bonds have “very close maturities and similar coupon rates,” so a switch may have limited impact on the roll

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

(Bloomberg) -- Payer skews in U.S. rates continue to remain flat and don’t reflect any risk of a positive shift in the mood of Fed and ECB policy in the second half of the year, Bloomberg strategist Tanvir Sandhu writes.

• See chart here of spread between USD 3m10y 25bp OTM payer vol and 25bp OTM receiver vol
• Short-dated skews tend to predict subsequent changes in underlying rates, with flatter skews since December indicating risks to duration shorts
• There has been limited appetite for payer skews despite significantly cheapening as Trump reflation trades extend unwind amid latest U.S. political crisis around possibility that the president may have obstructed justice, an impeachable offense
• There is an active debate around a potential change in risk language at the ECB meeting on June 8, before the FOMC on June 14. ECB is expected to gradually reduce its net purchases of government bonds to zero over the course of 2018
• FOMC speakers continue to discuss scenarios for balance-sheet normalization and seem inclined to start a path of gradual reduction from 2018 while U.S. Treasury issuance may increase via delivery of powerful fiscal expansion policy
• A normalization in accommodative policy will see the private sector needing a greater discount on bonds as they may increasingly underwrite a bigger amount of duration risk. This would see the term premium finally begin to normalize
• 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: Ven Ram at vram1@bloomberg.net Anil Varma