HALISTER1: RESEARCH ROUNDUP: Focus on EU Referendum Impact on USD Rates

RESEARCH ROUNDUP: Focus on EU Referendum Impact on USD Rates

(Bloomberg) -- Analysts move from a long duration bias to a more neutral view as focus mounts on the outcome of U.K.’s EU referendum.
  • Citi suggests lightening up on duration longs, JPMorgan stop-out of 5Y UST shorts, Deutsche Bank recommend buying Treasury dips on any post-vote relief trade
  • Barclays (strategists including Rajiv Setia)
    • June FOMC meeting perceived as dovish, Fed again re- assessed the path of a short-run neutral rate lower
    • Turns neutral on long Aug ’16 FF and 2s10s Treasury curve flattener recommendation
    • Focus turns to UK referendum; paying 2Y USD swaps looks attractive to position for remain vote, improvements in payroll data
    • Heading into belly supply, recommends short 3s7s10s fly; tends to systematically cheapen ahead of auctions
  • BNP (strategists including Timothy High)
    • June FOMC reinforced view the Fed is already finished raising rates for this cycle
    • Shadow Fed funds rate has more accurately reflected monetary policy than nominal Fed funds since QE began; rate has already tightened 325 bps since Oct. 2014, referring to index here
    • This, together with Fed’s ongoing tightening bias, growing risks of recession, yield curve should be flatter not steeper; recommends 2s10s UST or swap flatteners
    • Expects swap spreads to respond to changing supply dynamics; deficit to stabilize, T-bill supply to rise, SOMA re-investment, net Treasury supply to fall in coming years
      • Turns bullish swap spreads, recommend buying 5Y spread outright or vs selling 2Y
  • BofAML (strategists including Shyam Rajan)
    • Simplistic framework showing 10Y rates are pricing ~25bps Brexit premium; expects return to 1.75% to 1.85% range on remain vote; leave would cause further re- allocations to U.S. as bund yields likely to trade close to -0.25%
    • Dramatic gravitational pull of negative yields across the globe will remain the dominant theme that will remain irrespective of the Brexit outcome
    • Trade playing out in global rates markets isn’t just one of policy mistake but also incremental erosion of policy credibility, evident in global bull flattening of yield curves
  • Citi (strategists including Jabaz Mathai)
    • Front end of rates markets can’t rally much further, wait until after EU referendum to fade the move; premature to go short the market, but lightening up on long positions makes sense
    • Breakevens are grinding lower given de-risking environment; valuations are attractive, wait until past referendum to initiate longs
    • Continue to like long 1y10y straddles given near-term uncertainty about UK referendum
      • Believe recent decline in survey based long-term inflation expectations is fundamentally supportive for vols due to the potential for an aggressive Fed response down the road
  • Deutsche Bank (strategists including Dominic Konstam)
    • Real money, leveraged accounts have been going into UK referendum short duration, heavily concentrated in front end out to five years; more dovish turn from the Fed has resulted in a pain trade
    • Almost every major bond market has made new all-time lows, Treasuries the exception but should follow regardless of the outcome of the vote, recommends buying dips on any post vote relief trade
  • JPMorgan (strategists including Alex Roever)
    • Treasury yields decline with intermediates outperforming, as increased Brexit risks, dovish Fed more than offset strengthening domestic data
    • Skepticism around FOMC’s projections has only grown, markets not fully pricing in another 25bps increase until Dec. 2017, fewer than two hikes priced over the next three years
      • Unwind short in 5Y USTs, maintain 1s2s steepeners
    • Under Brexit scenario, see 10Y Treasury yields falling by 10bps-12bps, Italy/Germany sovereign spreads widen to 200bps
    • Treasuries look rich by several measures, only recommend fading via conditional payer swaptions
  • TD Securities (strategists including Priya Misra)
    • An exit from the EU has significant implications for the U.S. economy; still see evidence pointing to victory for the “remain” camp
    • Risk-reward not particularly appealing for many popular Brexit trades
    • Recommends owning Treasuries vs bunds heading into the referendum
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

People
Alex Roever (Bear Stearns & Co Inc)
Dominic Konstam (Deutsche Bank AG)
Jabaz Mathai (Citigroup Inc)
Priya Misra (TD Securities USA LLC)
Rajiv Setia (Barclays PLC)

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