Halister News

(Bloomberg) -- Fed’s balance-sheet reduction, ECB tapering, U.S. debt ceiling, govt budget battles and geopolitical risks “all loom as potential triggers” of higher volatility, Wells Fargo Securities strategists write in Oct. 4 note.

• “Volatility remains low, but should pick up soon”: strategists Michael Schumacher, Boris Rjavinski, Zachary Griffiths write
• Implied volatility “could rise substantially over the next few months”  
  • Fed’s “balance sheet diet” to contribute to rise; impact could take effect “in earnest” in 1H 2018 as market participants “come to grips” with combination of reduced central-bank buying, increased UST supply 
  • WFS expects Treasury 2s/5s and 10s/30s to steepen
  • Reductions in central bank’s portfolio should outweigh supply effect in 5s/10s; this part of curve should flatten 
• Market’s assessment of Fed’s likely rate increases this year and next “looks much more reasonable now than it did a month ago”
  • WFS sees next hike in December and two more in 2018
• Investors who expect sharp increase in inflation in near-term should consider buying 2018 TIPS outright or on breakeven basis

To contact the reporter on this story: Vivien Lou Chen in San Francisco at vchen1@bloomberg.net To contact the editors responsible for this story: Boris Korby at bkorby1@bloomberg.net Mark Tannenbaum