HALISTER1: 5y5y Real Rates Are ~65bp Too Low, BofAML Says

5y5y Real Rates Are ~65bp Too Low, BofAML Says

(Bloomberg) -- Forward real interest rates “remain extremely low relative to fair value,” and are likely to rise under new administration’s plans, BofAML strategists Shyam Rajan and Carol Zhang write in note.
  • BofAML’s model for real rates includes potential GDP, global savings rate, forward deficit to GDP projections, foreign official buying of USTs as a share of GDP, and average maturity of private-sector UST debt
  • Trump policies “will likely lead to either a good increase in real rates” from higher GDP and lower savings “or a bad one” from higher deficits and longer average maturity of debt
  • Model-derived fair value for 5y5y real rates is 1.55% vs 5y5y TIPS yield of ~0.90%; indicates fair value of ~4% for 5y5y nominal rates
  • BofAML recommends being short 10y real rates both in cash and swaps, a top trade for 2017; risk is dramatic increase in price-insensitive demand for USTs or a very dovish Fed
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

People
Carol Zhang (Bank of America Corp)
Shyam Rajan (Bank of America Corp)

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