Halister News

(Bloomberg) -- Near-term positioning views on USTs are broadly bearish, based on factors including Fed rate-hike odds higher than what market is pricing in, potential for inflation to stabilize, and prospect of increased auction sizes.

• Deutsche Bank (strategists led by Stuart Sparks, Sept. 8 note)
  • Current market pricing rests on the “unlikely” presumption “that inflation is stuck well below target for the foreseeable future”
  • That makes August PPI and CPI releases this week “even more important” than normal
  • For rates to decline from current levels, market needs to begin to price in rate cuts, or to compress term premium back to 2016 lows, unlikely with ECB poised to trim asset purchases
  • DB recommends modestly increasing bearish risk via paid position in 3y1y-2y1y forward rate spread
• JPMorgan (strategists led by Jay Barry, Sept. 9 note)
  • Declining odds of a technical default on USTs “suggests there is room for Treasuries to cheapen over the near term,” based on previous experience
  • Also, JPM expects core CPI increase of 0.16% in August, a result that “will keep the door open” for a December Fed rate increase
  • Position indicators “are skewed toward modestly higher yields”
  • JPM remains bearish on front-end duration, recommends maintaining shorts in 2Y sector
• NatWest Markets (strategists led by John Briggs, Sept. 8 note)
  • Based on lifting of near-term concerns about debt ceiling and government funding, switches from bullish stance on U.S. rates to expecting “bearish correction back to the upper end of the yield range,” 2.25%-2.3% for UST 10Y
  • However amid “substantial risks” including FOMC meeting, hurricanes and North Korea, prefers curve expression to outright shorts; paying 5s on 2s5s10s fly also should benefit from “any reintroduction of long term Fed pricing”
• Nomura (strategists led by George Goncalves, Sept. 8 note)
  • UST 10Y yield has scope for 15bp-20bp selloff into Fed balance sheet unwind, as market remains rich vs Nomura fair value estimates
  • Analysis assumes that Fed board’s new members may want to proceed slowly with any rate hikes, delaying action until June 2018, and that recent hurricanes will “lead to noisy job and inflation data” that also may delay Fed’s decisions
• TD (strategists led by Priya Misra, Sept. 8 note)
  • Modest rise in rates likely over coming months as “a lot of bad news is priced in,” debt ceiling won’t be a factor until February at the earliest, economy is growing fast enough for Fed to hike gradually, and supply pressure is likely as Treasury increases auction sizes in November refunding
  • TD recommends short duration position via 3m15y payer spreads
• Barclays (strategists led by Rajiv Setia, Sept. 7 note)
  • Continues to recommend 2s10s flatteners as Fed “would like to keep the option of hiking once more alive”
  • Long-dated yields “do not look low in the context of low neutral rates,” despite having rallied
• Citi (strategist Jason Williams, in Sept. 7 note)
  • Stage is set for “a mild selloff in rates” based on agreement to suspend U.S. debt ceiling until December; 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