Halister News

(Bloomberg) -- Near-term positioning views on USTs are in broad agreement that last week’s hawkish FOMC decision pushed front-end rates as high as they’re likely to go in the near term.

• TD (strategists led by Priya Misra, Sept. 22 note)
  • Turns neutral on duration and curve
  • Curve can continue to flatten, but requires a faster pace of Fed hikes that has no near-term catalyst; economic data “may become more difficult to read” following hurricanes
• Soc Gen (strategists led by Subadra Rajappa, Sept. 21 note)
  • Take profits on front-end shorts as yields are unlikely to rise further until a few weeks before December FOMC meeting
  • Belly yields could rise further on strength in U.S. economic data and reduction in ECB asset purchases; short 5s vs 30s or vs 2s and 10s should perform well through year-end unless Treasury increases long-end issuance
• Morgan Stanley (strategists led by Matthew Hornbach, Sept. 22 note)
  • Favors curve flatteners, disfavors owning inflation protection 
    • “When a central bank tightens policy with inflation moving further below its target, why do investors need to worry about duration risk” or own inflation protection?
  • Recommended trades include UST 2s30s flatteners and eurodollar curve flatteners (EDZ7/EDZ8 and EDZ7/EDZ9) as “the market-implied pace of rate hikes has increased too much” in September
• Nomura (strategists led by George Goncalves, Sept. 22 note)
  • Days of “dovish hikes” appear to be over; September FOMC meeting “can be characterized as hawkish”
  • Rates should rise and swap spreads should widen; however, “the real tightening from rising term premium and liquidity draining will result in less Fed hikes over time,” thus balance-sheet unwind “ultimately prevents a full flattening” or curve inversion
  • Real curve flattening should allow forward inflation breakevens to perform; 5y5y BEI should benefit from CPI recovery and repricing of inflation premium
• JPMorgan (strategists led by Jay Barry, Sept. 22 note)
  • With market pricing in more than 60% odds of a 25bp hike in December, “we turned neutral on duration and recommended unwinding duration shorts in the 2-year sector”
  • Also, “traditional post-Fed dynamics suggest risks to lower yields over the near term,” as front-end yields tend to rise leading up to long-format FOMC meeting and reverse lower in following weeks
  • Recommends 3s5s steepeners as curve at front end “has lagged the move to higher yields”
• BofA (Shyam Rajan and Carol Zhang, Sept. 22 note)
  • Turns neutral from short on front end of U.S. curve after odds of a December rate hike topped 65%, “a level never reached this far ahead of an actual hike in this cycle”; MORE

To contact the reporter on this story: Elizabeth Stanton in New York at estanton@bloomberg.net To contact the editors responsible for this story: Boris Korby at bkorby1@bloomberg.net Vivien Lou Chen