Halister News

(Bloomberg) -- Near-term positioning views on USTs take into account potential for slowing inflation, fiscal policy stagnation and geopolitical risk to contain long-end yields; risks include strong July retail sales data and potential for a risk-asset selloff, valuation driven or otherwise.

• Citi (Strategists led by Jabaz Mathai, Aug. 11 note)
  • Weak inflation readings “validate our core thesis for lower rates”; medium term trends still bullish, but receding of geopolitical worries could cheapen USTs a bit
  • FOMC “is making a slow turn in its understanding of inflation dynamics” toward accepting longer-term trends weighing on inflation
  • The market “is already doing the work for the Fed by pushing rate hikes further and further out,” however “there is significant room to rally in the intermediate sector of the curve”
• Deutsche Bank (Strategists led by Aleksandar Kocic, Aug. 11 note)
  • Higher yields, steeper curve remain core view, yet it’s “increasingly difficult to hold with strong conviction” after latest CPI data
  • Collapse in 10Y yields this year “probably reflects firstly the fading optimism of a big budget plan and higher debt issuance, with tamer expectation of the Fed’s path of hiking playing a secondary role”
• Barclays (Strategists led by Rajiv Setia, Aug. 10 note)
  • 2s10s flattener “continues to offer an attractive risk-reward” amid rising geopolitical uncertainty
  • Absent “a clear turn toward easier fiscal policy, long-end yields should not rise much, but front- end yields could still reprice modestly higher” aided by debt limit if money funds avoid T-bills
• Morgan Stanley (Strategists led by Matthew Hornbach, Aug. 11 note)
  • Stay overweight 5Y point on curve vs 2s and 30s “given its superior carry and expected- rolldown, positive convexity to flight-to-quality events that could tighten financial conditions and lead to a Fed on-hold, and cheapness relative to the current expected pace of rate hikes”
  • Risks to 5Y include: strong retail sales, FOMC minutes that “make it appear as if September is not a slam dunk”
• Nomura (Strategists led by George Goncalves, Aug. 11 note)
  • Bearish call for rates to rise into 4Q (based on Fed balance-sheet unwind, ECB taper and inflation rebound) faces risks including risk- asset selloff from “grossly overvalued” levels

--With assistance from Elizabeth Stanton. To contact the reporter on this story: Anna Windemuth in New York at awindemuth1@bloomberg.net To contact the editors responsible for this story: Boris Korby at bkorby1@bloomberg.net Elizabeth Stanton