Halister News

(Bloomberg) -- UST yield curves at the flattest levels in 10 years draw the attention of rates strategists; Barclays, Morgan Stanley and Societe Generale among those calling for the trend to continue, with events like Donald Trump’s Fed chair pick and the Treasury’s quarterly refunding statement out of the way. Bank of America is an exception, expects steepening in the intermediate part of the curve on easier fiscal policy and higher inflation.  

• Yield curves extend flattening Monday; 2s30s at ~118bps and 5s30s at ~81bps, while 2s10s at ~70.5bps in longest flattening streak in nearly two years
• Barclays (Rajiv Setia and Michael Pond, Nov. 3 note)
  • Maintain curve-flattener recommendation; had called for initiating 3s10s flattener a week earlier at 71bps, now at 60bps
  • The flattening trade would be vulnerable to increased issuance at long end of curve, but latest Treasury refunding meeting “suggests that this is not a near-term risk,” supporting their trade idea
  • Treasury likely to gradually increase sizes of 2Y, 3Y and 5Y auctions at February meeting
• Morgan Stanley (strategists led by Matthew Hornbach, Nov. 3 note)
  • Continue to suggest 2s30s flattening trade, though investors should be on alert to lighten up ahead of October CPI report released Nov. 15, which has “game-changing potential”
  • Should last CPI reading before December FOMC meeting miss expectations, market-implied odds of a hike could fall to 50%, which would steepen the curve 
• SocGen (strategists led by Bruno Braizinha and Subadra Rajappa, Nov. 2 note)
  • Recommend holding 3-month forward 2s10s bull flatteners
  • Enter tactical steepener in 10s30s TIPS breakevens at ~6bps, with target of 13bps; stop at 2bps; good through early November
• BofA (Ralf Preusser and Shyam Rajan, Nov. 3 note)
  • Expect steeper 2s5s and 3s7s yield curves because of easier fiscal policy, bigger deficits and higher inflation expectations
  • Short position in 5Y-10Y Treasuries “on the belief that tax reform chances are higher than priced in,” which would push term premium 40-60bps higher if passed
• Citi (strategists led by Jabaz Mathai, Nov. 3 note)
  • Treasury will increase coupon issuance in February; $2b quarterly increase seen in FRNs, $2b in 2Y-3Y and $1b from 5Y-30Y
  • Short-term bullish on TIPS, with a long position in 5Y breakevens based on expectations for higher energy prices and increases in some core categories
• Deutsche Bank (strategists led by Stuart Sparks, Nov. 3 note)
  • Look for 10Y yields to rise to 2.6% by year-end as market re-prices for higher terminal real short rate
  • Fed to hike in December, see end-2019 short rate of 2.15%
  • Even with a tax plan, persistent long-end demand for Treasuries from overseas investors and pensions to keep term premium subdued

To contact the reporter on this story: Brian Chappatta in New York at bchappatta1@bloomberg.net To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net Vivien Lou Chen