Halister News

(Bloomberg) -- Near-term positioning views on USTs take into account potential for curve to steepen further based on fiscal policy developments and expectations for increased supply, though several banks argue that last week’s steepening was overdone or at least premature.

• BofA (Shyam Rajan and Carol Zhang, Sept. 29 note)
  • “We expect yields to continue to drift higher over the next few weeks” for three main reasons, in addition to progress on fiscal front and FOMC de-emphasizing data because of hurricane impact
    • First, “the global nature of the selloff” means that buyers will look first to domestic markets and not to USTs
    • Second, recent move has been driven by breakevens as opposed to real rates, which is “neither too positive for the dollar not too negative for equities,” and thus is unlikely to spur risk-off flows into bonds
    • Term premium likely to rise based on higher UST supply and Fed balance-sheet unwind
• Barclays (strategists led by Anshul Pradhan, Sept. 28 note)
  • Continues to recommend 2s10s flatteners, as short rates are likely to normalize at a faster pace than is priced in, while “moderate economic backdrop argues against a large rise in long- term rates”
  • Fed balance sheet reduction won’t put much upward pressure on term premia; of the ~90bp drop in term premia from pre-crisis average, nearly 50bp is attributable to lower inflation risk premia; reduced rate volatility and higher insurance value of USTs also contributed
• Citi (strategists led by Jabaz Mathai, Sept. 29 note)
  • 10Y rate can rise another ~20bp if GOP fiscal plan gets fully priced in
  • Forecast assumes 1% increase in structural deficit/GDP will result in ~33bp increase in 10Y nominal rate, which may be an underestimate because of possibility of hawkish Fed response
• Deutsche Bank (strategists led by Stuart Sparks, Sept. 29 note)
  • Remains “bearish strategically and tactically short”; expects 10Y yield to reach 2.45%, based on “market repricing of the Fed’s rate trajectory” as inflation converges to central bank’s target
  • Term premium restoration “will likely take longer to play out,” as supply pressure “looks like a 2019 matter”; MORE
  • Persistent flatness of 10s30s is a function of the strongest demand for long-end duration in years, evident in Treasury Strips activity and asset manager positioning in Ultra Bond futures
• Morgan Stanley (strategists led by Matthew Hornbach, Sept. 29 note)
  • Yield curve steepening spurred by tax reform plan “has been overly optimistic” on proposed cuts
  • “The market was fooled once earlier in the year, and we suspect investors are setting up to be fooled again”
• NatWest (strategists led by John Briggs, Sept. 29 note)
  • Following last week’s rise in yields, “we are scaling back our bearishness on the market outright”
  • 5s30s curve can continue to steepen to at least 100bp, however, “driven by near term market optimism on taxes as well as over-extended curve flattener positions”
• Nomura (strategists led by George Goncalves, Sept. 29 note)
  • Reemergence of term premia “will keep curves relatively steep and lead to a more volatile 2s10s curve vs 5s30s”
  • Fed balance sheet normalization means shape of curve “could be driven by a different mix of the expected path of short-term rates and term premia”
  • Additional duration investors will absorb is likely to be concentrated in middle part of curve, causing term premium to rise most there
• SocGen (strategists led by Subadra Rajappa, Sept. 28 note)
  • Front end will “re-anchor” because market is “reluctant to price in more than one hike at a time”
  • This will result in bear-steepening, bull-flattening moves, with risks skewed toward bear-steepening into year-end
  • 2s10s has ~10bp of upside
  • UST 10Y will face “significant resistance” around 2.5%-2.6% because “meaningful fiscal stimulus” is uncertain
• TD (strategists led by Priya Misra, Sept. 29 note)
  • Deficit-financed tax cuts should steepen curve; 1ppt increase in deficit/GDP ratio is associated with 30bp-60bp increase in long-term interest rates

To contact the reporter on this story: Elizabeth Stanton in New York at estanton@bloomberg.net To contact the editors responsible for this story: Boris Korby at bkorby1@bloomberg.net Elizabeth Stanton, Greg Chang