Halister News

(Bloomberg) -- Over the coming year, investors should underweight bunds and JGBs, overweight U.K. gilts and adopt a neutral stance toward U.S. Treasuries, Morgan Stanley strategists including Anton Heese write in client note.

• USTs are mostly priced for rate hikes that Morgan Stanley expects the Fed to deliver, though bund, gilt and JGB markets aren’t priced vs their expectations for central bank policy
• Expect Treasury market selloff to continue into the first 100 days of Trump’s presidency as he starts laying the groundwork for his fiscal policy agenda; forecast 10y yields to end 1Q 2017 at 2.50%; FOMC to deliver two hikes in 2017
• In the euro area, after a six-month QE extension in Dec., the improved inflation outlook should mean ECB starts to guide the market towards its intention to taper asset purchases
• In the U.K., expect gilt market to outperform vs USTs and bunds as Brexit uncertainty weighs on the economy, keeps the MPC accommodative despite rising inflation
  • Look for BOE to end its QE program, but will cut rates by the middle of 2017
• In terms of trades, like 5s30s steepeners in the U.S., U.K. and Japan; 2s10s steepeners in Germany over the first six months of 2017
  • See the Treasury, bund and JGB curves bear-steepening relative to forwards, while expect gilt curve to bull- steepen
  • Would see the 1H steepening of bund, Treasury curves as an opportunity to enter bear-flatteners for the back half of the year
    • Top trades for 2017 include long gilts vs bunds and long JGBi breakevens