Halister News

(Bloomberg) -- Near-term positioning views on USTs are in broad agreement that the prospect of a U.S. government shutdown at the end of this week could drive gains; positioning and global output momentum also are bullish, offsetting bearish influence of Fed rate path and pro-growth fiscal policy agenda.

• JPMorgan (strategists led by Jay Barry)
  • Was stopped out of short position in 5Y and 2s5s steepener during last week’s rally; turned neutral on duration
  • “We still think the fundamental backdrop remains supportive of higher yields, but we await more clarity over international and domestic political events before re-entering short duration positions”
  • There is “heightened sensitivity” about possibility of a U.S. government shutdown, which would temper optimism about pro-growth policy achievements; as the April 28 deadline approaches “political uncertainty could further depress Treasury yields”

• Deutsche Bank (strategists led by Dominic Konstam)
  • G3 yield momentum suggests bear market “may be over”
  • Yield momentum -- the change in the year vs the previous year -- will rise to new peaks in June if yields stay where they are, though it “should be going in the opposite direction” based on global output momentum
  • It’s not unreasonable to expect a 50bp drop in G3 yields after yield momentum peaks
  • This “increases the importance of progress” on Trump agenda; failure to pass tax reform and/or fiscal stimulus “accentuates tail risks that yields could decline back into the pre-election range”
  • Bear market in G3 yields “was never that strong” as it “failed to break the long run decline in global yields”; if it is over, “the bull market may never have noticed”
  • To hedge scenario “in which declining output momentum ultimately allows a significant decline in yields later this year,” Deutsche Bank recommends contingent curve caps or receiver strike flies

• Citi (strategists led by Jabaz Mathai)
  • UST 2y-5y yields are at levels “that can only be justified longer term in an adverse economic outlook”
  • French elections have been a factor, but bigger driver “has been the ongoing soft patch in the data,” including retail sales and CPI
  • Shorting the front end “might work in a tactical sense”; however, “offside short positioning cast doubt” on it as a viable trade
  • Leveraged funds remain record net short in eurodollar futures; this could set in motion “a perfect recalibration storm in rates” comparable to the the flash rally of October 2014
  • “There may or may not be a one-off capitulation event in eurodollars,” though “positioning needs to be cleaner before rates back up from current levels”

• TD Securities (Priya Misra and Gennadiy Goldberg)
  • Fade the decline in short-term yields; weak March CPI and retail sales don’t signal “the start of a new trend,” and market is underpricing Fed rate hikes
  • 1m5y payer spread recommended “as a limited downside way to position for higher rates driven by a repricing of Fed policy”
  • 10Y term premium unlikely to rise much until “signs of real progress” on tax reform are seen
  • A government shutdown would spur market to further downgrade odds of tax reform, which “could push Treasury yields lower in the near term”

• Barclays (strategists led by Rajiv Setia)
  • Maintain 3s10s flatteners (previously recommended) given that Fed speak remains hawkish
  • Maintain U.S.-U.K. 10Y convergence trade amid potential for a stronger U.K. Conservative majority and reduced Brexit risks
  • In RV, maintain short OTR 30s vs double old 30s as liquidity premium remains too high