HALISTER1: Fed Balance Sheet, Debt Limit May Factor in UST Futures Roll: CS

Fed Balance Sheet, Debt Limit May Factor in UST Futures Roll: CS

(Bloomberg) -- There’s “some steepening bias” for the Treasury curve during the futures roll, since a potential Fed balance sheet announcement would overlap with the delivery window for the September contract, Credit Suisse strategist Jonathan Cohn wrote; CS expects 10Y yield to move 10-15bp in the week following a Fed announcement.
  • Debt ceiling may also factor into the U7/Z7 roll cycle, since the repo curve can flatten “and even invert” as Treasury’s drop- dead date nears; this would eat into shorts’ carry “and give the calendar roll a mild bullish bias”
  • Bearish TUU7/TUZ7; longs should roll early
    • Asset managers’ net long has expanded, currently 1.5 std deviations above its 3yr avg
    • Calendar roll is trading “modestly rich” to CS model, which points to a bearish bias
  • Bearish FVU7/FVZ7; longs should roll early
    • Asset managers’ net long appears to be “primary motivating factor” for the roll, given “relatively little bias” from other valuation metrics
    • Calendar roll “modestly cheap” to model due to FVZ7 “appearing relatively rich”
  • Neutral TYU7/TYZ7
    • Asset managers’ net long “moderately below” the 3yr avg and appears “unlikely to impart a directional bias”
    • Negative net basis in TYU7 not large enough to “warrant outright bearishness”
  • Bullish UXYU7/UXYZ7; longs should roll late
    • Asset managers’ net short about 1 std deviation below the avg, suggesting bullish bias
    • “There’s little else in the way of metrics to bias the roll in either direction”
  • Neutral USU7/USZ7
    • Front contract’s positive net basis only half-a-tick and unlikely to have a “material impact on the calendar roll”
    • “Remote chance” that cheapest-to-deliver switches in the contracts to 4% May-37 from 4.5% Feb-36; “such a switch, at least in the front contract, would require a sharp selloff in rates”
  • Bearish WNU7/WNZ7; longs should roll early
    • Expect “extremely large” asset manager long base “will dominate other supportive metrics”
To contact the reporter on this story: Alexandra Harris in New York at aharris48@bloomberg.net To contact the editors responsible for this story: Boris Korby at bkorby1@bloomberg.net Greg Chang

Alert: HALISTER1
Source: BFW (Bloomberg First Word)

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Jonathan Cohn (Credit Suisse Group AG)

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