HALISTER1: SocGen Turns Bearish on Bonds Into Fed; France Risks ‘Overblown’

SocGen Turns Bearish on Bonds Into Fed; France Risks ‘Overblown’

(Bloomberg) -- Bearish forces have returned to global bond markets ahead of the Fed’s March meeting, with long-end yields “threatening to break higher,” Societe Generale analysts including Vincent Chaigneau write in client note.
  • See 10-year Treasury yields approaching “danger zone”; a break above 2.50% will be bearish
    • Front end and belly of the curve likely to lead the way in a selloff, favoring “bear-flattening bias” on the USD curve in near term
  • See focus shifting to ECB; another TLTRO would support reflation trade but as ECB slowly turns less dovish, “Taper 2” fears will grow
    • See reflation pressure in rates markets as “somewhat capped,” particularly at the back end of the curve
  • See opportunities as combined Fed and French risks are dislocating FX risk reversals
    • “Buying EUR long-tail CMS caps, contingent on short rates remaining low, is attractive”
    • SG also likes buying caps or cap spreads on EUR 10y-30y or 5y-30y, as curve volume remains cheap
    • Think concerns about France “are overblown,” with a return of spreads to sub-50bp levels vs 10y bund possible after election
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

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Vincent Chaigneau (Societe Generale SA)

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