RESEARCH ROUNDUP: UST Path Hinges on Fed’s Read on Inflation
(Bloomberg) -- Positioning views on USTs are focused on bullish inflation trend and its potential impact on Fed policy and yield curve; other concerns include possible changes to FOMC forecasts and progress toward balance sheet normalization.
- Citi (Jabaz Mathai)
- “Our view on inflation continues to be that it has peaked”
- Fed officials “will now have to disregard two consecutive negative surprises to CPI if they hike in June,” which they “might very well do”
- Consequently, 2s5s “is likely to flatten further” and “we feel more confident in our 5s30s steepener trade”
- Nomura (strategists led by George Goncalves)
- Market reaction to April CPI “shows inflation is the focus during a time when global central banks are trying to dial back their accommodation”
- Performance of inflation products “could indicate that investors are more concerned with factors likely to push down inflation than with factors pushing it up”
- In U.S., lack of inflation premium “is signaling that markets are not pricing in a substantial risk of an inflation overshoot ahead”
- “For now we can see real rates creep higher but eventually central bankers might manage the ‘asymmetry’ risks by turning dovish again”
- Correlations between rates and commodities are near multi-year lows; these “have tended to be short-lived” and usually have been followed by U.S. rates rallying in subsequent months
- BMO (Ian Lyngen and Aaron Kohli)
- Two straight months of disappointing core inflation performance stokes interest in “the point at which investors conclude the FOMC is overplaying its hand at the risk of materially slowing the economy”
- Absence of data this week and constructive technical picture “suggests that the rally has room to run”
- JPMorgan (strategists led by Jay Barry)
- “Cyclical dynamics suggest intermediate yields can rise over the next few weeks ahead of the FOMC meeting”
- Yields “have consistently risen ahead of FOMC meetings which are accompanied by an SEP and a press conference” over past 2 years, by 5bp on avg in month leading up to long-form FOMC meeting
- Barclays (strategists led by Rajiv Setia)
- Sees “no material change” in 2017 fed funds forecasts at June FOMC but a “drift” toward a four-hike median for 2018
- Remains neutral on 3s10s flattener given positioning and global long-dated yield selloff
- Maintains recommendation to short OTR30s (Feb47s) vs double-old 30s based on view that liquidity premium should be lower for OTR30s, also U.S.-U.K. 10Y convergence trade based on market’s pessimism about U.K. outlook
- BofA (Carol Zhang)
- Cross-asset skew is a “good leading indicator” for a decline in UST yields as rates fell in ~71% of episodes since 2007 when a threshold was triggered; MORE
- Morgan Stanley (strategists led by Matthew Hornbach)
- June and September FOMC meetings “will be key risk events in the timeline toward the commencement of balance sheet normalization”
- UST yields may rise toward higher end of YTD range if investors pull forward their expectations on timing of balance-sheet normalization; MORE
--With assistance from Edward Bolingbroke.
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 Greg Chang
Alert:
HALISTER1Source: BFW (Bloomberg First Word)
People Jabaz Mathai (Citigroup Inc)
Aaron Kohli (Bank of Montreal)
Carol Zhang (Bank of America Corp)
George Goncalves (Nomura Holdings Inc)
Ian Lyngen (Bank of Montreal)
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