Halister News

(Bloomberg) -- Near-term positioning views on USTs take into account market’s proximity to major support levels, with Citi, Societe Generale and TD positing they will hold. BofA and Nomura expect further weakness. Deutsche Bank and JPMorgan adjust year-end yield targets; Barclays and Morgan Stanley market curve flatteners.

• Citi (Ruslan Bikbov and Jabaz Mathai, Oct. 27 note)
  • UST selloff “is likely to run out of steam” even if Taylor is nominated for Fed chair; however, a Taylor nomination combined with convexity flows could push 10Y yield toward 2.7%
  • Fade a selloff above 2.6% because tax reform is likeliest in 1Q and Taylor is more flexible than his reputation
• SocGen (strategists led by Subadra Rajappa, Oct. 26 note)
  • 10Y is likely to find “significant support” in the 2.5%-2.6% range
  • Treasury is likely to increase 2Y auction by $2b, 10Y and 30Y auctions by $1b starting in November; MORE
• TD (strategists led by Priya Misra, Oct. 27 note)
  • 10Y yield is unlikely to sustain a move above 2.50%; MORE
• BofA (Shyam Rajan and Carol Zhang, Oct. 27 note)
  • Short positioning buy speculators in U.S. rate futures “is not as stretched as widely believed,” and isn’t an impediment to a further selloff; MORE
• Nomura (strategists led by George Goncalves, Oct. 27 note)
  • While markets are focused exclusively on Fed chair news, “in the very short run we could see the 10-yr rate being driven up by technical factors,” in particular golden crosses and head-and-shoulder patterns
  • On golden crosses (50-DMA over 200-DMA), “we do not think the dip buyers would be able to hold back the selling pressure from the CTAs/algos”
  • Most of the repricing in long-term rates “is coming from future Fed expectations,” and current valuations don’t yet reflect the return of term premia that’s likely to result from more supply and reduced foreign flows
• Deutsche Bank (strategists led by Stuart Sparks, Oct. 27 note)
  • End-2017 10Y yield forecast lowered to 2.60% from 2.75% “to reflect a reduced probability of term premium recovery this year”
  • Term premium “has remained sticky due to persistent demand from foreign investors and pensions”
  • That could change during 2018 if ECB tapers purchases to zero and if higher short-term rates drive USD gains that curb dollar-driven inflows
• JPMorgan (strategists led by Jay Barry, Oct. 27 note)
  • Raises interest-rate forecasts to reflect changes in growth dynamics “and the market’s ability to price the Fed”
  • End-2017 10Y target is 2.50% (vs 2.40%), 2Y is 1.65% (vs 1.60%); mid-2018 targets are 2.60% for 10Y (vs 2.50%), 2.10% for 2Y (vs 2%)
• Barclays (strategists led by Rajiv Setia, Oct. 26 note)
  • Recommends initiating 3s10s flatteners based on “risk of a dovish shift in the Fed’s reaction function and of a taper tantrum in Europe”
  • Short-term real yields remain negative, while long-term real yields “look high relative to measures of neutral rate and global real yields”; positioning “also supports a curve flattener,” as mutual funds appear to be underweight their benchmarks; CTAs and macro hedge funds “have also become short”
• Morgan Stanley (strategists led by Matthew Hornbach, Oct. 27 note)
  • Remain in 2s30s flatteners yet neutral on duration amid risk from tax reform and Fed chair announcement, and short positioning
  • FOMC meeting may include acknowledgment of decline in inflation expectations in recent years
• Wells Fargo (strategists led by Michael Schumacher, Oct. 27 note)
  • UST 2s10s curve should “flatten significantly” if Taylor is nominated for Fed chair; if Powell is nominated, “a very modest bull steepener” is possible
  • 10s30s steepeners should do well if a tax cut is enacted this year
  • UST yields, swap rates and TIPS breakevens should begin “tracking economic fundamentals more closely” as Fed balance sheet shrinks
  • By end-2018, 10Y yield “once again could correlate positively to economic surprises, and key data points such as core inflation”

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