HALISTER1: TD Recommends Long Position in UST 10Y Targeting 1.55%

TD Recommends Long Position in UST 10Y Targeting 1.55%

(Bloomberg) -- Rise in U.S. rates over last few weeks is mostly a function of higher global yields, especially gilts and JGBs, and is unlikely to be sustained because BOJ won’t step away from easing any time soon, TD strategists Priya Misra and Cheng Chen say in note.
  • They recommend long position in UST 10Y at 1.73% targeting 1.55%, stop at 1.85%
  • Leadership from JGBs is corroborated by:
    • UST curve steepening (should not have occurred if better U.S. data were the driver)
    • Real rates, not inflation expectations, account for most of the increase
    • High global bond correlations
    • Time-zone analysis showing most of the post-Brexit increase in U.S. rates has occurred outside of U.S. trading hours
  • Trade should benefit from cheapness of U.S. rates vs global rates, assuming that JGB yields stabilize, and “growing acceptance at the Fed of a lower terminal rate and a gradual pace”
  • Risks to trade include “any move by the BOJ that moves long-end JGB yields higher” and surprise Fed rate increase next week
    • “However, under both these scenarios we expect risky assets to underperform, which should provide a ceiling” on 10Y yield
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

People
Priya Misra (TD Securities USA LLC)

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