HALISTER1: Real Rates ‘Still Far From Unsustainably Tight’: BofA

Real Rates ‘Still Far From Unsustainably Tight’: BofA

(Bloomberg) -- High correlation between Dollar Index and 10Y breakevens over past month indicates that the rise in rates has been “a policy catch-up trade,” rather than “a policy mistake trade,” BofA strategists Shyam Rajan and Carol Zhang say in note.
  • It suggests that “higher real rates with sideways breakevens is reasonable, especially given that real rates are still far from unsustainably tight levels”
  • Other key themes for 2017:
    • Foreign private demand for USTs will be curtailed by high FX hedging costs; domestic private demand should escalate led by pension and insurance community
    • Maintain small short bias in 5s after its dramatic cheapening
    • Forward 5s30s will approach 0bp with return of boom/bust cycle and normal hiking cycle
    • 30y swap spreads likely to be “much wider,” approaching 0bp, barring ultra-long UST issuance or “dramatically higher deficits”
    • 10Y real rates can rise another 25bp-30bps amid decline in reserve holdings, hawkish Fed, higher volatility, risk parity deleveraging and extended TIPS positioning
  • Technical analysis supports 3% target for 10Y yield, 4% for 30Y yield, strategist Paul Ciana says; 5Y has scope to 2.32%, possibly 2.5%
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

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Carol Zhang (Bank of America Corp)
Shyam Rajan (Bank of America Corp)
Paul Ciana (Bank of America Corp)

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