Halister News

(Bloomberg) -- Two-year OIS/UST spreads look ~4bp wide to fair value based on three-month GC/OIS, primary dealer inventories of short-dated Treasury paper and bill supply, Citi strategist Ruslan Bikbov said in Oct. 20 note. 

• Other factors that point to tightening risks going into year- end:
  • Net bill supply may rise going into year-end (est. $115b), especially after the debt ceiling suspension ends Dec. 8, since Treasury will be able to raise its cash balance
  • G-SIB surcharge score on Dec. 31 should put pressure on bank balance sheets, and be exacerbated by the Fed’s recent proposal to include cleared derivative transactions on behalf of bank clients in the calculation
  • Fed’s reserves should decline by as much as $780b by end of 2018 as the runoff pace accelerates, which may translate into “structural cheapening” of GC repo by as much as ~10bp tightening in OIS/GC, a move that may not yet be fully priced in
  • There’s a risk of increased coupon supply at the November refunding announcement, although “this is not our base case view”
  • Expected decline in UST demand from foreign central banks
• Citi prefers expressing view in OIS/UST tighteners in cash as opposed to OIS/TU invoice spreads, since TU shorts “already may be crowded”

To contact the reporter on this story: Alexandra Harris in New York at aharris48@bloomberg.net To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net Greg Chang