RESEARCH ROUNDUP: USD 10Y Rate Has Scope to 3%
Source: BFW (Bloomberg First Word)
People
Dominic Konstam (Deutsche Bank AG)
George Goncalves (Nomura Holdings Inc)
Matthew Hornbach (Morgan Stanley)
Priya Misra (TD Securities USA LLC)
Rajiv Setia (Barclays PLC)
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UUID: 7947283
(Bloomberg) -- Forecasts for higher yields are based on fiscal policy and Fed outlooks and correlation breakdown with USD; Barclays has outlier forecast, recommends going long UST 10Y.
Alert: HALISTER1- Deutsche Bank (strategists led by Dominic Konstam)
- Expects higher yields and steeper curve out to 5Y; Fed will exercise caution but is “unlikely prematurely to remove optionality,” may appear to be behind the curve
- Successful fiscal policy implementation can push 10Y yields above 3%
- Correlation of rates with USD should break down and reverse, meaning higher yields accompanied by weaker dollar, “a double glow for reserve-driven Treasury buying longer term”
- BofA (strategists including Shyam Rajan)
- 10Y yield will touch 3% by mid-year, level off toward year-end
- Drivers will include: markets not pricing in enough Fed action, term premium too low relative to previous tax cut episodes, reflation in Europe and Japan, and asset manager long positioning; MORE
- Nomura (strategists including George Goncalves)
- 5s30s curve has scope to steepen to 125bp, “given its persistent flatness” ahead of Treasury refunding announcement and fiscal reflation backdrop
- Also, any rebound in foreign demand Treasuries based on weaker USD should to benefit belly-to-intermediate part of the curve
- 5s10s30s fly is “quite cheap vs the level of rates” especially if Fed raises rates more than twice
- Morgan Stanley (strategists led by Matthew Hornbach)
- Bond market indicators “have turned uniformly negative” across G4 rates markets and correlations between stocks and 10y government bond yields have risen; investors should scale into 5s30s steepeners over coming week
- MS forecast for January nonfarm payroll change is +205k; this would likely flatten 5s30s curve, creating opportunity to enter steepeners
- Discouraging inflation prints should follow, pulling market-implied odds of a Fed rate increase in March back to zero and steepening the curve
- Bond market indicators “have turned uniformly negative” across G4 rates markets and correlations between stocks and 10y government bond yields have risen; investors should scale into 5s30s steepeners over coming week
- TD Securities (strategists including Priya Misra)
- Gains for U.S. stocks should drive variable-annuity paying flows in the long end; MORE
- Paying needs should decrease over time as the option embedded in the VA moves further from the strike; recent move provides an attractive level to put on 5s30s spread curve flatteners for a medium-term trade
- Forthcoming changes to Bloomberg Barclays indexes should be mildly supportive for Treasuries as their weight in the index increases
- Gains for U.S. stocks should drive variable-annuity paying flows in the long end; MORE
- Barclays (strategists including Rajiv Setia)
- Recommends going long UST 10Y at 2.52% “tactically” as policy uncertainty remains elevated
- Rationale includes complacency in markets given the range of outcomes amid policy uncertainty, while medium/long-term Fed expectations and term premia should be contained; MORE
- In relative value arena, they recommend selling 8.875% due 2/15/19 vs TUH7 contract (DV01 neutral) as the former looks excessively rich, the latter relatively cheap
- Review of 2016 Treasury auction performance reveals improvement in 30y auctions reflective of larger setup
- Performance of Bond/Ultra Bond futures steepeners into the auctions was better than in 2015, particularly around refunding supply
- Recommends going long UST 10Y at 2.52% “tactically” as policy uncertainty remains elevated
- SocGen (strategists including Vincent Chaigneau)
- Risks are tilted towards a more hawkish Fed this week, however it will stop short of guiding markets towards a rate hike at the March meeting
- Recommend positioning for this scenario via whites/greens eurodollar steepeners or 3-month forward 2s10s bear flatteners; maintain a bearish bias on U.S. rates and expect term premiums to continue to rise
- Recent Fed talk has focused on the balance sheet, timing of stopping reinvestment proceeds; such action would accelerate the normalization of the term premia at the back end
- Risks are tilted towards a more hawkish Fed this week, however it will stop short of guiding markets towards a rate hike at the March meeting
Source: BFW (Bloomberg First Word)
People
Dominic Konstam (Deutsche Bank AG)
George Goncalves (Nomura Holdings Inc)
Matthew Hornbach (Morgan Stanley)
Priya Misra (TD Securities USA LLC)
Rajiv Setia (Barclays PLC)
To de-activate this alert, click here
UUID: 7947283