HALISTER1: RESEARCH ROUNDUP: UST Yields, Positioning Views

RESEARCH ROUNDUP: UST Yields, Positioning Views

(Bloomberg) -- Mixed views on both duration and curves; Morgan Stanley and BofAML both highlight potential Japanese buying flows in USTs, though from different account bases.
  • Morgan Stanley (strategists including Matthew Hornbach)
    • History suggests Japanese investors increase their non- yen bond buying dramatically following the end of Golden Week
    • Expect the belly of the UST curve to outperform, most of the buying concentrated in intermediates (5Y-15Y)
    • Previously recommended trades should benefit from this possible flow; maintain UST 5s30s steepener recommendation: MORE
  • Citi (strategists including Jabaz Mathai)
    • 10y rates are right in the middle of fair-value range of 1.5%-2% and a move to 1.5% is looking increasingly probable
    • U.S. rates are still high when looked upon in context of spreads to other sovereign curves
    • Front end prices only a slight term premium for the next two years, not much room to rally near term
  • BofAML (strategists including Shyam Rajan)
    • Possible Japanese intervention flows will be the next key theme for flows in USTs
    • Historically, Japanese official interventions have benefited the belly of the curve and supported UST auctions
    • Belly spreads (3Y-6Y) should benefit the most; best traded through swap spreads rather than outright, as seen during Chinese reserve sales in 3Q; pay belly of 2s5s10s spread curve fly as a way to position for this risk
  • Deutsche Bank (Dominic Konstam)
    • Continue to forecast a flat trajectory, see 10Y yields at 1.75% through year end
    • Growing risks of a slowdown where corporates defend margins or profit share by reducing labor demand, which could produce a substantial bullish flattener
    • Recommend conditional bear-steepeners by selling mid- curve payers in the belly, buying payers at the back end as current vol differentials attractive; buy 6M 10Y ATMF payers vs sell 6M 2Y2Y 12bp OTM payers costless
  • Barclays (strategists including Rajiv Setia)
    • Not much room for yields to rise, given mixed data; wide differential between U.S. and other haven yields, particularly at back end
    • Recommend initiating UST 5s30s flatteners, given current steep levels and one-sided positioning in steepeners
    • Favor long 10sUS30s fly ahead of the bond auction; weighted 10s-US CTD-30s fly typically richens 4bps-6bps starting around eight business days before auction
    • Prefer owning TII 04/2017s; recently cheapened after falling out of the 1Y-30Y TIPS index; 3-mo. carry estimated at 160bps, recommend hedging longs with WTI crude futures
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

People
Matthew Hornbach (Morgan Stanley)
Dominic Konstam (Deutsche Bank AG)
Jabaz Mathai (Citigroup Inc)
Rajiv Setia (Barclays PLC)
Shyam Rajan (Bank of America Corp)

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