Halister News

(Bloomberg) -- Near-term positioning views on USTs take into account potential for yield curve to move based on changes in FOMC dot plot at Wednesday’s meeting.

• Morgan Stanley (strategists led by Matthew Hornbach, Sept. 15 note)
  • Recommends 2s30s flatteners at 140bp into Sept. 20 FOMC decision based on risk that median longer-run dot will fall to 2.75% from 3%
  • 6 dots are below the median; only two more need to move to 2.75% to move the median, and “several FOMC participants have spoken about it over the intermeeting period”
• Nomura (strategists led by George Goncalves, Sept. 15 note)
  • “Mild selloff” likely after FOMC meeting; while announcement effects may be priced in, “the uncertainty of a world with less CB support is not”
  • “Mild downward revision” to 2018 and 2019 dots (up to 25bp) is likely; more hawkish scenario is any lack of downward revision in the dot plot; this should bear-flatten 5s30s
  • More dovish scenario is bigger downward revision to dots; this should unleash belly-led gains
• Barclays (strategists led by Rajiv Setia, Sept. 14 note)
  • Recommends 2s10s flatteners into FOMC meeting
  • While Fed may raise rates in December, “we do not see any major catalyst for a long-end selloff”
  • “Primary threat for higher U.S. yields” is a selloff in other DM bonds
  • 5s30s spread curve steepeners look attractive based on potential for rebound in rates and stocks to ease receiving pressure in long-end swaps from liability hedgers
• Citi (strategists led by Jabaz Mathai, in Sept. 15 note)
  • Risks are skewed to upside in yield in eurodollar strip and rate curve in general; “we are comfortable staying short” into FOMC meeting
  • Impact of Fed normalization announcement will likely be marginal as the market is “pricing much of the effect already”
  • Term premium in 10s eventually will move +/- 10bp depending on where the Fed decides to set the reserve target, unlikely before next year; market is pricing in supply effect associated with $500m in reserves
• NatWest Markets (strategists led by John Briggs, Sept. 15 note)
  • 2.20% is important trendline support for UST 10Y yield, a break of which clears way for move to 2.25%-2.30%
  • Recommended positions include pay Dec18 OIS and 2s10s flattener; Dec18 should cheapen as inflation moves higher and FOMC membership becomes more hawkish; for 2s10s, tightening risks are underpriced, while Treasury supply picture may not gain traction until closer to November refunding announcement
• JPMorgan (strategists led by Jay Barry, Sept. 15 note)
  • USTs “have room to cheapen further” following debt-ceiling deal, however “we do not expect yields to reprice as rapidly” as last week; remain short 2-year notes
  • 20-year sector “appears rich,” yet may richen further on year-end and supply dynamics
  • Extraordinary measures should allow Treasury to remain under debt ceiling into 2Q 2018; MORE
• BofA (Shyam Rajan and Carol Zhang, Sept. 15 note)
  • PBOC’s removal of reserve requirement for trading foreign currency forwards was a key driver of last week’s selloff, as it could reverse gains in reserve demand for USTs; 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 Elizabeth Stanton, Mark Tannenbaum