Halister News

(Bloomberg) -- Consensus is for Treasury curve to bear steepen based on expectations fiscal policy will be inflationary; convexity-related hedging has potential to exacerbate long-end underperformance as yields rise; steeper curve faces near-term risk from improved odds of March rate hike, however.

• Deutsche Bank (strategists led by Dominic Konstam)
  • Higher rates, steeper curve view maintained; favor selling into Treasury rally with view 10Y yields can reach 3%
  • Concrete progress on tax reform and fiscal policy in general needed to break out of recent range
  • Risk to higher yield view is an unwind of “diversification trade” where strong dollar would lead to lower yields, risk-off
  • In derivatives, they recommend long Ultra Bond futures against cash bond in steepener ahead of Feb. 9 30Y auction; alternatively, long Ultra Bond on butterfly vs Bond futures and cash bond

• BofA (strategists including Shyam Rajan)
  • Remain confident yields will rise with 10Y to reach 3% by mid-year; view is based on fiscal stimulus driving Fed expectations, resulting in asset manager long liquidation
  • Remain “wary” of low March rate hike expectations; strong data and a median Fed member expecting 3 hikes this year can make compelling case
  • Risks to bearish view include lack of details on tax reform by end of February, inability of stronger data to increase near-term hike expectations and inability of rates to rise on dollar weakness
  • Recommended trades include receiving 2Y spreads as front-end widening appears overdone

• Morgan Stanley (strategists led by Matthew Hornbach)
  • Recommend 5s30s steepeners at 120bp and paying USD 30Y swaps versus UST 5Y notes at 80bp
  • Primary risk to steepener trade is March rate hike, hence longer maturity steepener leg also expressed through 30Y USD swaps
  • Employment report suggests enough labor market slack to prevent overheating, hence base case Fed will pass on March rate hike
  • Bond market indicators “remain bearish on duration in 10-year Treasuries, gilts, and JGBs”

• TD Securities (strategists including Priya Misra)
  • Fiscal easing, inflationary risks and convexity hedging putting upside pressure on rates
  • Expect 10Y yield to remain between 2.25%-2.5% until signs of tax reform consensus emerge
  • Closed 5s30s flattener position for a loss as Trump fiscal stimulus package now expected later in year than previously

• Barclays (strategists including Rajiv Setia)
  • January employment report reduced concern Fed is behind the curve; maintain long 10Y UST recommendation as political uncertainty remains elevated
  • Recommend buying low strike receivers on medium expiry short tenor rates such as 2y2y; trade looks attractive as a recession hedge and from a vol perspective

• JP Morgan (Jay Barry, Bruce Sun and Phoebe White)
  • Tactical positioning remains bullish on Treasuries given short positioning, Fed likely on hold until June and scope/timing of fiscal stimulus likely to disappoint
  • Maintain 2s5s30s belly-richening flies and 10s30s steepeners
  • Take profit on 10s30s swap spread steepeners given potential for selloff in rates which could trigger receiving pressure in the long end

• Citi (Jabaz Mathai and Jason Williams)
  • Added cash 5s30s steepener to research portfolio during week of Jan. 30
    • Curve poised to steepen as view of Fed shifts from aggressive to risk-adverse, and amid risk based on “redrawing geopolitical alliances”
  • December eurodollars trading cheap versus spline and against swaps, specifically EDZ8 and EDZ9; changes in open interest suggest new short positions have been concentrated in December contract
    • Asset manager and leveraged funds have substantially increased eurodollar short positions since U.S. election