HALISTER1: RESEARCH ROUNDUP: Bullish Bias on USD Rates Remains

RESEARCH ROUNDUP: Bullish Bias on USD Rates Remains

(Bloomberg) -- Most analysts maintain a bullish bias in U.S. Treasuries, although they see risks from the resilience of risk assets. Focus remains on renewed market stress, global central bank easing, and implications for Fed policy.
  • Deutsche Bank, Citi lower yield forecasts, following move from BofAML last week, Goldman see “two-thirds” probability of at least one Fed hike by year-end
  • Barclays (strategists including Rajiv Setia)
    • Measures of financial market stress have rebounded, look subdued relative to 1Q, reflecting expectations of easier monetary policy amid slowing global growth
    • Maintain long 10Y USTs vs Bunds, attractive to position for an exacerbation of worries about length of U.S. recovery
    • Remain neutral on UST curve; 5s30s curve has not steepened in the rally, curve looks fair
    • Buy USD 6m3y 1x2 ATM, ATM+27 payer spreads as attractive way to position for a rebound in labor market data
  • BofAML (strategists including Ralf Preusser)
    • Strong employment report, in-line or above house est. of 180k, with solid participation and wage growth should moderate some of the recent longer-dated rate declines
    • Print below the 3-month moving average of 116k will result in further flattening of yield curve, push 10Y rates closer to end 3Q target of 1.25%
    • Soft report could increase market speculation for near- term rate cut, though see recent pricing of this outcome as overdone, high bar for easing in the near term
    • Do not expect employment report to have a material impact on near-term expectations for Fed tightening
  • Citi (strategists including Jabaz Mathai)
    • BOE, ECB have indicated an increase in stimulus intensity, this argues for a flatter curve; remain tactically short, last week, opened a set of trades looking for a bounce back in rates; medium term view for rates is bullish
    • Treasuries, bunds tend to outperform in July, due to seasonal decline in issuance; decline in net supply this July is “especially significant”
    • Lower year end forecast to 1.60% in 10Y, reflecting extension of the status quo, reduce 2Y forecast to 75bps
    • With EU referendum behind us, breakevens likely to return to pre-June 23 levels; recommend longs in 10Y breakevens
    • Recent RMB weakening increases risk of PBOC interventions, risk to front-end spreads; continue to like buying 3Y spreads as impact should be smaller due to better transparency of China’s FX policy, potential for Japan’s FX interventions
  • Deutsche Bank (strategists including Dominic Konstam)
    • Expect 10Y yields to grind lower in coming months, stabilizing into a channel ~1.25%; curve to see additional bullish flattening
      • Forecasts anticipate 2Y stabilizing at, or just below, current levels, 5s and 10s to rally 25bps, 30s to decline toward 1.75%
    • Adjusted yield curve is signaling ~60% chance of recession in next 12-months, highest since August 2008, last two U.S. recessions were preceded by low 70% probability readings, which could happen if 10s rally another 40bps
    • Dislocation between OIS, risky asset prices, S&P has recovered all post-Brexit losses, front-end remains low; next rate cut very data-dependent, if risk assets hold gains, front-end can steepen; recommend paying July/Dec. OIS at 0.75bps
  • Goldman Sachs (strategists including Rohan Khanna)
    • Post-Brexit price action across asset classes, G-4 bonds, implies the event has “local” implications for growth but ‘global’ implications for monetary policy
    • U.K. is not an economic bellwether, ECB likely to wait for incoming data before easing, uncertainty shock may delay Fed but won’t prevent hiking
    • Assign a two-thirds probability of at least one hike by year-end
    • Measured in standard deviation units (sigmas) relative to long-run fair value, core bond yields are “stretched”, led by Treasuries, now greater than 2 sigma, this level of valuations have historically been a precursor to a sharp reversal
  • JPMorgan (strategists including Jay Barry)
    • Sharp decline in yields comes as markets price out Fed hikes for next two years, inflation expectations fall sharply, DM central banks continued to ease, and investor positioning swings from short to long
    • Expect intermediate Treasury yields to remain range- bound, continue to project 10Y at 1.70% at year-end
    • Markets unlikely to price in Fed tightening over near term, don’t expect curve to flatten until later this year
    • Take profits on 2s5s spread curve steepeners, foreign demand vs constrained dealer balance sheets is primary driver of spreads
    • Liquidity, dealer hedging flows should continue to be most important driver of gamma markets
  • Morgan Stanley (strategists including Anton Heese)
    • Risk assets globally have performed better than expected since U.K. referendum; this may be driven by expectations of monetary policy response
    • Stronger performance of risk assets have turned bond market indicators to neutral
      • Further, as yield curves flatten, carry and roll argument for owning duration (similar to valuation argument) deteriorates further
    • For now, retain long duration recommendation across G-4, focused in the belly of the curve; long 5Y USTs at 2.21%
    • While a significant improvement in NFP is expected; only an exceptionally strong print, or upward revision to prior releases, would reverse downward trend over past 3 months
  • TD Securities (strategists including Priya Misra)
    • Stock market complacent about growth spillover from uncertainty shock caused by Brexit, central banks have an easing bias, though they are running out of steam
    • U.S. rates are fair value at current levels given low global bond yields
    • In the front end, GC, effectives, Libor have all moved higher due to combination of intermediate holding company implementation (foreign banks required to comply by July 1), quarter-end, money fund reform and reserve manager selling
      • Libor/OIS to continue to widen as money fund reform approaches, expect rise in CP rates to push libor higher, widening FRA/OIS and swap spreads
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

People
Anton Heese (Morgan Stanley)
Dominic Konstam (Deutsche Bank AG)
Jabaz Mathai (Citigroup Inc)
Jay Barry (JPMorgan Chase & Co)
Priya Misra (TD Securities USA LLC)

To de-activate this alert, click here

UUID: 7947283