RESEARCH ROUNDUP: Flatteners Favored After Fed; Front-End Plays
Source: BFW (Bloomberg First Word)
People
Dominic Konstam (Deutsche Bank AG)
Jabaz Mathai (Citigroup Inc)
Jay Barry (JPMorgan Chase & Co)
Laurence Mutkin (BNP Paribas SA)
Matthew Hornbach (Morgan Stanley)
Topics
BFW US Treasury Analyst Wrap
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UUID: 7947283
(Bloomberg) -- Analysts focus on recent shift in Federal Reserve comments and indicate bias toward curve flatteners, expressed through a variation of trades.
Alert: HALISTER1- Deutsche Bank (strategists including Dominic Konstam)
- Fed interpreting easing in financial conditions as opportunity to force rate expectations higher; ease in conditions due to Fed’s dovish turn earlier this year
- Hawkish minutes will weigh on risk, bias yields lower, flatten the curve and keep risk premium supported at the front-end
- Recommend fading recent weakness in the belly, should not be materially different from where it was before the minutes
- Recommend vanilla/mid-curve conditional bear flatteners in the belly; buy 3m2Y ATMF payers vs 3m2Y2Y 14bp OTM payers at zero cost
- Fed interpreting easing in financial conditions as opportunity to force rate expectations higher; ease in conditions due to Fed’s dovish turn earlier this year
- Citi (strategists including Jabaz Mathai)
- Front-end does not provide much risk/reward for longs; using shorts in front-end via put spreads on EDZ6 to hedge overall bullish duration bias
- See downside risks to U.S. growth, premature for market to price higher terminal rate; 10Y+ sector attractive following recent sell-off; expect these tenors to perform, leading to further flattening
- Continue to like call spreads on the bond, 5y5y longs vs Europe, 10s30s flatteners
- Morgan Stanley (strategists including Matthew Hornbach)
- Remain neutral on duration; Fed’s shift to more hawkish stance should be negative for risk, how negative will depend on Fed policy expectations after the next hike
- FOMC comments suggesting “at least” two hikes this year seem appropriate; will cap upside in risky assets and may send then meaningfully lower; dot plot will be key
- Continue to recommend 2s5s steepeners initiated after the Fed minutes: MORE
- Remain neutral on duration; Fed’s shift to more hawkish stance should be negative for risk, how negative will depend on Fed policy expectations after the next hike
- JPMorgan (strategists including Jay Barry)
- Unwind 5Y duration shorts following recent sell-off, turn neutral on Treasuries; little over the near term to cause markets to price significantly higher odds of Fed tightening
- USD appreciation following more hawkish Fed may lead markets to reduce projections for medium-term normalization
- Neutral bias opens opportunity to earn carry; continue to prefer 1x2 receiver spreads in blues, offers initial bearish exposure, attractive breakeven level
- More hawkish Fed policy outlook is bearish for EM FX; may prove negative for front-end, intermediate spreads given potential for reserve outflows; unwind OIS wideners in 2s, 5s
- BNP (strategists including Lawrence Mutkin)
- April FOMC minutes were hawkish, caught markets napping; BNP economists see Fed on hold through 2016, 2017, though acknowledge risks to this view
- As market prices in greater probability of higher Fed Funds rate, expect 5Y swap to cheapen on the curve; recommend paying 2s5s10s, entry -6bps, target 10bps, stop -13bps
- Barclays (strategists including Rajiv Setia)
- Maintain UST 5s30s flattener given more hawkish Fed outlook; spread still ~10bps too steep to fair value
- Recommend buying 6m3Y ATM, ATM+27bps 1x2 payer spread at zero cost; aims to fade rich levels in top left vols, position for increase in rates
- Recommends being short 7s on 3s7s10s fly, hedged for market directionality, to position for belly supply: MORE
- SocGen (strategists including Vincent Chaigneau)
- Summer rate hike back on the table following FOMC minutes, risks in USTs now skewed to downside; continue to recommend positions that profit from belly underperformance
- Add or hold 6m fwd 5s30s bear flatteners (6m5Y payer spread vs 6m30Y payer), 6m10Y costless payer ladder ATM/+18.5bps/37bps
- Recommend paying USD 2s5s10s fly vs EUR, adding the EUR leg improves carry and roll on the trade
Source: BFW (Bloomberg First Word)
People
Dominic Konstam (Deutsche Bank AG)
Jabaz Mathai (Citigroup Inc)
Jay Barry (JPMorgan Chase & Co)
Laurence Mutkin (BNP Paribas SA)
Matthew Hornbach (Morgan Stanley)
Topics
BFW US Treasury Analyst Wrap
To de-activate this alert, click here
UUID: 7947283