HALISTER1: RESEARCH ROUNDUP: Focus on Playing Fed Outlook in USD Rates

RESEARCH ROUNDUP: Focus on Playing Fed Outlook in USD Rates

(Bloomberg) -- Analysts focus on new trades in front-end of the curve following latest employment report and its potential implications on Fed hiking cycle; views on duration are mixed.
  • Morgan Stanley (strategists including Matthew Hornbach)
    • Fed will continue to embrace the “gradual” path for the removal of policy accommodation, will become more “cautious” over time; recommend own UST 5Y notes on the 2s5s30s butterfly
      • No longer suggest investors hold UST 2s5s steepeners as don’t believe the market-implied pace of rate hikes will increase from current levels
    • Neutral on duration across the G7 sovereign markets; previously suggested long duration in 10Y bunds, gilts but momentum has slowed, equity market performance improved
  • Citi (strategists including Jabaz Mathai)
    • Following latest employment report, upside risks to front-end yield still limited to mid-March FOMC levels (~0.97%)
    • Market anxiety to increase in coming weeks ahead of EU referendum, should support USTs; 1.5% on the 10Y seems reachable given positioning/hedging activity into referendum
      • Brexit trades in USTs: recommend buying 1y10y straddles, selling 10Y breakevens
    • See value in conditional 2s5s bull steepeners; market has started pricing increased likelihood of policy mistake, 2s5s curve reached the flattest level since 2009
      • 3m5y vol trades at about 30% premium to 3m2y, allows entering conditional bull steepeners at attractive levels
  • JPMorgan (strategists including Alex Roever)
    • Remain neutral on duration given crosscurrents of rising recession risks, global event risks, rich valuations; expect Treasury yields to remain range-bound in coming weeks
    • Front end of yield curve looks too flat after adjusting for the market’s medium-term Fed expectations, recommend initiating 1s2s steepeners
    • Slow growth but firming inflation raises risk that Fed is behind the curve, should steepen front-end; sell EDU8 vs EDU6
  • BofAML (strategists including Shyam Rajan)
    • Despite steepening post-payrolls, don’t believe this is the start of a steepening trend
      • Maintain 3Y FWD 2s10s flatteners (currently at 49bps), expect steepening trend in 5s30s to run out of steam beyond 130bps
    • Relative relationships in front-end rates will not adjust much to next Fed tightening, will be much more impacted by regulatory changes coming later this year: MORE
  • Deutsche Bank (strategists including Dominic Konstam)
    • “Abysmal” May employment report intensifies concerns of an endogenous slowdown in labor demand, also take July hike off the table, suggests a far slower pace of hiking
      • Bias for lower nominal yields, significantly lower real yields remains in place; real yield curve should flatten, led by 30Y
  • Barclays (strategists including Rajiv Setia)
    • Markets have lowered expectations of a near-term hike, though not by enough; trends in labor market data are unlikely to justify a rate hike at the July meeting, continue to recommend a 10y UST-Bunds convergence trade, recommend going long the August 2016 Fed Funds contract
    • Expect any sell-off in rates to be led by the long end of the curve, potentially because of rate sell-offs elsewhere in developed markets, due to a potential remain vote in the EU referendum; find ATM 3m5Y/3m30Y bear steepeners attractive
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

People
Matthew Hornbach (Morgan Stanley)
Alex Roever (Bear Stearns & Co Inc)
Dominic Konstam (Deutsche Bank AG)
Jabaz Mathai (Citigroup Inc)
Rajiv Setia (Barclays PLC)

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