RESEARCH ROUNDUP: UST Strategists Eye 20Y Issuance, Fed Policy
(Bloomberg) -- Positioning views on USTs are focused on the potential for Fed reinvestment policy and the outlook for 20Y issuance to impact the shape of the curve.
- Citi (Jabaz Mathai and Jason Williams)
- Rates should “sell off gradually over the next month led by real yields,” into the June FOMC meeting
- Market is pricing in 10%-20% odds that Treasury introduces a 20Y curve point; MORE
- Deutsche Bank (Dominic Konstam)
- Treasury auction sizes “could go either up or down” in 2018
- If deficit is stable and Fed continues reinvestments, gross issuance can be cut by $285b from 2017 level; cuts would be made in bills with minimal impact on curve
- Gross issuance will match 2017 level if deficit reaches 3.2% of GDP and Fed redeems half its maturing Treasuries
- Deficit increase to 4% of GDP and Fed redeeming 75% of maturing holdings would require $250b increase in issuance; increase could be in front end, across maturities or barbelled
- Every $1b increase in 30Y auction size with 10Y unchanged should steepen 10s30s by 3.6bp; increases of $1b to each should steepen slope by 1.2bp
- JPMorgan (strategists led by Jay Barry)
- Remains bearish, holds shorts in 3Y based on expectation for above-trend growth in rest of 2017, political risks that “have eased significantly,” and positions that “are no longer a headwind to higher yields”
- Treasury is likelier to bring back 20Y issuance than to introduce an ultra-long curve point; MORE
- Morgan Stanley (Matthew Hornbach)
- “Treasury yields will rise in reaction” if FOMC members “want to end Treasury reinvestments all at once”
- 7-year sector would lead initially as that’s where average duration of current issuance is concentrated, then the long end, which doesn’t benefit from carry and rolldown
- Treasury should bring back 20Y bond instead of introducing an ultra-long curve point; MORE
- Nomura (strategists led by George Goncalves)
- “We doubt the Treasury has enough time to perform a complete cost-benefit analysis” on ultralong issuance “before August, nor do we think it would reveal their findings before an official refunding”
- With ultra-long issuance discussion “no longer front and center,” 10s30s curves will settle into 60bp-70bp range
- TD (Priya Misra and Gennadiy Goldberg)
- Disconnect between U.S. rates and stock markets -- 10y yield near low end of trading range with stocks near highs -- reflects “fears of modest slowdown in the US economy, resulting in a slower removal of Fed accommodation”
- It “can correct via a faster pace of hikes”
- 10Y yield should remain near 2.5% until there are clear signs of progress on tax reform
- BMO (Ian Lyngen and Aaron Kohli)
- May refunding “has historically been a pivotal point for the seasonal patterns in the Treasury market”
- 10Y yields from 1990 to 2009 had a tendency to peak for the year around the time of the May refunding
- Since then, April has also been a bullish month
- In 5Y sector, stochastics “are definitively on the cusp and we’re seeing early signs of a curl signaling a rally”
- BofA (Shyam Rajan and Carol Zhang)
- Drop in volatility is driving a “relentless bid for bonds in NY trading hours”: MORE
- Barclays (strategists led by Rajiv Setia)
- Turn neutral on 3s10s flattener given positioning and global long-dated yield selloff
- Expect the Fed to maintain tightening bias, while productivity and wage growth “may lead some at the Fed to reassess their estimate of the long-run rate”
- Maintain short OTR30s (Feb47s) vs double-old 30s based on view that liquidity premium should be lower for OTR30s
Alert:
HALISTER1Source: BFW (Bloomberg First Word)
People Jabaz Mathai (Citigroup Inc)
Jason Williams (Citigroup Inc)
Aaron Kohli (Bank of Montreal)
Carol Zhang (Bank of America Corp)
Dominic Konstam (Deutsche Bank AG)
To de-activate this alert, click
hereTo modify this alert, click
hereUUID: 7947283