HALISTER1: RESEARCH ROUNDUP: UST Yields May Edge Higher on Better Eco Data

RESEARCH ROUNDUP: UST Yields May Edge Higher on Better Eco Data

(Bloomberg) -- Strategists see UST yields remaining largely rangebound into year end, with the potential to edge higher amid better economic data and possible Fed rate hike this year.
  • Barclays (strategists led by Rajiv Setia)
    • Fed to avoid overreacting to Brexit; likely to acknowledge improving domestic data; statement “likely to maintain a balanced tone, keeping its options open”
    • Maintain recommendation to sell UST 5Y based on expectation that investor pessimism will fade further
    • Maintain 3m/5y-3m/30y bull-steepeners; MORE
    • Maintain 2s30s swap spread curve flatteners; there is “more room to go” despite recent sharp flattening trend
  • BofAML (Shyam Rajan)
    • Forced selling likely reduced in yield back-up, given recent shift of Japanese demand to insurance companies from megabanks
    • “Revisit summer seasonality,” note that 10Y yields in U.S./U.K./EU have fallen nearly 75% of the time during August
    • Continue to recommend long 2Y swap spreads given further prime outflows may pressure FRA-OIS and widen out 3s1s Libor basis
  • BNP (Daniel Tangho, Timothy High)
    • Wait to initiate new longs, given current market direction driven by technicals and lack of evidence of overbought conditions
    • Buy target for UST 10Y raised to 1.75%-1.85%; MORE
    • Stronger domestic data and updated Fed expectations add to case for higher yields
    • Rate hike seen as early as Sept., with a “small chance” of a Dec. rate hike as well
    • Data to decide timing; rate hike process would start with more upbeat FOMC statement and subsequent hawkish minutes and speeches noting diminished risks
  • Deutsche Bank (Joseph LaVorgna)
    • 10Y yields to trade in channel around 1.25% for balance of year; current trading close to the top end of the channel
    • Fed at best to “eke out” a single rate hike this year
    • Term premium in U.S. rates to remain “depressed”
    • Real yields have further to fall, notably in the long- end; 10Y real yields ~30bp cheap to fair value
    • U.S. yields highly attractive in cross market, given a third of outstanding G-7 bonds have negative yields
  • Jefferies (Ward McCarthy)
    • Monetary policy landscape changed over past couple of months; June employment data suggests labor market in “pretty good shape” and post-Brexit developments “encouraging” from a U.S. perspective
    • Rate hike this year “improbable at current juncture"; ‘‘doubtful’’ Fed will signal rate hike intentions any time soon
  • JPM (strategists led by Jay Barry)
    • Look for Fed to remain on hold through 2017; downside pressure on yields to ‘‘intensify”
    • 10Y yields to reach low of 1%; “back and forth” of market pricing in rate cuts followed by QE should support intermediates relative to implied forwards; recommend duration longs in belly
    • Aug. holds seasonal bias for downside in yields, led by 5-10Y
      • Seasonality based on safe haven flows amid lower volume; higher foreign demand and higher-than- average index extensions
    • Own 5Y spreads relative to front-end
      • 2s5s spread at inverted levels; slow financial IG issuance in Aug.; investors moving long spread positions further out curve; trade to benefit from easing in repo market
  • Nomura (George Goncalves and Stanley Sun)
    • FOMC to provide “bigger role in shaping expectations for September rather than providing any key takeaways”
    • Add to belly longs of 7s10s30s; steeper skews and higher rates & vols provide buying opportunity in 3M2Y payer ladders “given constrained front-end bearish view”
  • SocGen (Ciaran O’Hagan)
    • Too early for Fed to position markets towards a Sept. rate hike despite recent data showing steady 2Q recovery; expect a rangebound environment, so position for both bullish and bearish scenarios in the medium term
    • Fed unlikely to add additional volatility ahead of Nov. 8 election, while overseas monetary easing (BOE, BOJ) could pressure USD
    • Hold/add to 6m2y costless payer ladder and 6m fwd 5s30s conditional bear steepeners
    • Hold/add to 4m10y costless receiver ladder and 6m fwd 2s10s conditional bull flatteners
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

People
Rajiv Setia (Barclays PLC)
Ciaran Ohagan (Societe Generale SA)
Daniel Tangho (BNP Paribas SA)
George Goncalves (Nomura Holdings Inc)
Jay Barry (JPMorgan Chase & Co)

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