Halister News

(Bloomberg) -- While investors “are eagerly looking towards policies that trigger a re-steepening of global yield curves” -- such as fiscal stimulus and central banks reducing purchase programs -- these may not have the expected effect, BofAML strategists Shyam Rajan and Ralf Preusser say in note.

• History suggests tinkering with central bank purchase programs can result in higher real curves, “tightening financial conditions and proving to be counterproductive”
• Fiscal stimulus “has often led to a healthy increase in rates driven by breakevens”; however, central bank purchases and/or tail risk of policy mistake could offset the normal response
• Single largest driver of global flattening over last 3 years has been decline in inflation expectations, which calls for fiscal policy, not curbing monetary purchase programs
• Narrow window to position for fiscal stimulus is best expressed “through fading the richness of the 5y point or being short real rates as opposed to curve steepeners”
• BofAML recommends selling 5Y outright or on 2s5s10s swap butterfly; also selling real yields, a reversal on one of the bank’s top trades for 2016
  • Investors should scale into real yield shorts via paying 10y real rates through inflation swaps