RESEARCH ROUNDUP: USTs Face Disruption From Fed Chair Decision
(Bloomberg) -- Near-term positioning views on USTs take into account potential for Fed chair succession and/or ECB policy shift to interfere with global and domestic growth dynamics, as well as Nafta pullout risk and improving technicals. Low inflation and hawkish Fed combination should flatten curve, hurt TIPS on breakeven.
- NatWest (strategists led by John Briggs, Oct. 13 note)
- Recommends long 10s on 5s10s30s at -15.5bp; “dipping our toe into a bullish 10s position, while attempting to mitigate some of the directional event risk from a Fed chair announcement”
- Barclays (strategists led by Anshul Pradhan, Oct. 12 note)
- With respect to Fed chair decision, “markets are largely priced for a continuation of status quo or a slight hawkish sift in the Fed’s reaction function”; risk is a dovish surprise
- Powell “is likely seen as closest to the status quo,” Warsh would be perceived as hawkish, Cohn as the most dovish choice
- Warsh nomination “would lead to higher front-end yields,” Cohn to “a significantly steeper curve”
- JPMorgan (strategists led by Jay Barry, Oct. 13 note)
- Positioning technicals “appear somewhat bullish,” though “we prefer to watch for a more broad-based shift in positions before initiating longs,” especially amid global factors including Oct. 26 ECB meeting
- Cyclical behavior of Treasury auctions, specifically tendency for long-end to steepen ahead of bond auctions, “appears to have broken down recently”; pre- auction belly richening butterflies are a better bet
- BofA (Shyam Rajan and Carol Zhang, Oct. 10 note)
- Standard deviation of global real GDP growth is lowest in last 50 years, at a time when growth projections and leading indicators are improving
- This should reduce focus on rate differentials and raise risk of coordinated central bank policy moves, as well as “a synchronized move up in global bond yields” in months ahead
- BMO (Ian Lyngen and Aaron Kohli, Oct. 13 note)
- Leans bullish on USTs, “as the realities of the data cycle continue to contrast with the Fed’s insistence that all is ‘right’ with the domestic economy”
- Also, near-term technical landscape “is more supportive than we’ve seen in several weeks,” with stochastics “decidedly bullish”
- Citi (strategists led by Jabaz Mathai, Oct. 13 note)
- Geopolitical risks “may be underpriced”; biggest is a U.S. pullout from Nafta (30% odds priced in), which could cause 16bp rally in 10Y yields, reflecting worries about impact on growth of supply chain disruptions
- Recommends buying belly of H8-Z8-U9 eurodollar fly based on Fed chair risk (falling odds of an extremely hawkish choice), fiscal reform (Fed could offset stimulus with additional 2019 rate hikes) and positioning (appears excessively short in Z8)
- Morgan Stanley (strategists led by Matthew Hornbach, Oct. 13 note)
- Recommends remaining in 2s30s flatteners amid “disappointment over realized and expected inflation,” as Fed appears to have “written off any downside in inflation” that is unrelated to unemployment rate or unexplainable in its macro framework
- TD (strategists led by Priya Misra, Oct. 13 note)
- Recommends selling 10Y TIPS on breakeven amid low inflation, hawkish Fed; MORE
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 Aaron Kohli (Bank of Montreal)
Anshul Pradhan (Barclays PLC)
Carol Zhang (Bank of America Corp)
Ian Lyngen (Bank of Montreal)
Jabaz Mathai (Citigroup Inc)
Topics India Macro News
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