HALISTER1: RESEARCH ROUNDUP: Long Positions in 5Y Swap Spreads Favored

RESEARCH ROUNDUP: Long Positions in 5Y Swap Spreads Favored

(Bloomberg) -- Analysts have mixed views on outright duration, though bias is toward longs in 5Y swap spreads with both Morgan Stanley and BofAML favoring this trade.
  • Morgan Stanley (strategists including Matthew Hornbach)
    • Stronger economic numbers in the U.S., weakening China data this past week make it hard for yield curves to steepen, no longer suggest UST 5s30s steepeners
    • Remain cautiously long breakevens as positive carry, momentum in oil prices augur well for breakevens; see risks given stronger retail sales, higher GDP tracking estimates
    • In swap spreads, like 5Y spread wideners; 2s5s spread curve extremely inverted, roll is ~1bp/month, Treasury supply and demand dynamic have improved, favoring spread wideners
  • JPMorgan (strategists including Alex Roever)
    • Revised down 10Y yield forecast by 25bps to 1.90%, given weaker growth expectations, greater sensitivity to global monetary policy, backdrop of low risk appetite
    • Continue to favor 5Y duration shorts, largely based on carry technicals; initiate long 5s on 2s5s10s butterfly, which offers positive carry and roll, relative value, little directionality
    • In swaptions, fade richness of 10Y sector via 2s10s30s belly cheapening flies with 3m OTM payers
  • BofAML (strategists including Shyam Rajan)
    • Buy 5Y spreads given they look cheap on curve, particularly vs 2Y spreads; expect foreign official purchases of USTs in the sector, Brexit concerns may also benefit
    • Corporate supply shocks more important for swap spreads than pre-Dodd Frank regime; two recent large supply days saw 10Y spreads tighten ~2.5bps, UST impact more in 30Y sector
  • Deutsche Bank (strategists including Dominic Konstam)
    • ECB, BOJ QE significance is clear in supply dynamics, central bank purchases have put downward pressure on global government yields
    • Don’t expect much movement in yields given Fed outlook, softer dollar, lower real yields; with yields trapped expect lower implied vol
    • Generally neutral on the curve, see greater risk of flattening, particularly on a move lower in nominal yields
    • In RV, both USM6, FVM6 look expensive on 10sUS30s, 3sFV5s flies; USD Swap 10Y rate look rich on 5s10s30s vs USTs
  • Barclays (strategists including Rajiv Setia)
    • Growth rates converging across regions, reflects role of financial conditions; German 10Y real yields at -90bps low relative to U.S. at +10bps, given growth differentials not large
    • Selloff more likely to be led by bunds/gilts given pessimism around outlook, U.K. referendum concerns; substantial upside in USTs possible if U.S. economy worsens
    • To position for convergence, continue to recommend long 10Y UST-Bunds, conditionally via buying U.S. 3m10y10y receivers vs selling them in Europe
    • Maintain 5s30s UST flatteners; spread is 10bps-15bps too steep vs fair value, fall in dealer inventories over past three months should support flatteners
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

People
Matthew Hornbach (Morgan Stanley)
Alex Roever (Bear Stearns & Co Inc)
Dominic Konstam (Deutsche Bank AG)
Rajiv Setia (Barclays PLC)
Shyam Rajan (Bank of America Corp)

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