How To Trade Rates In An “Event-Driven” Week

Earlier today I previewed Janet Yellen’s forthcoming Congressional testimony.

Needless to say, that will be one of next week’s key events and to let one bank tell it, rates will be mostly event-driven in the days ahead.

That is of course to say that they won’t be Trump-driven as they unquestionably were on Thursday when, in what was likely meant as a throw away comment, the new President told airline CEOs something bigly (well, technically he said “phenomenal” but you know he wanted to say “bigly”) is coming on taxes in the next “2-3 weeks.”

That sent yields, the dollar, and stocks soaring and sent White House officials scrambling to figure out how to make Trump’s promise come true.

In a testament to the contention that Trump was just making sh*t up, the administration actually felt it necessary to say the equivalent of “we promise it’s real” on Friday. Just look at this hilarious, actual headline that ran on Bloomberg today:

Trump’s ‘Phenomenal’ Tax Plan Is Real: White House

Anyway, assuming next week’s trading is indeed event-driven, you may find the following useful from UBS.

Via UBS

Rates: Remain long real duration; Inflation and Yellen are in the spotlight. We maintain long real duration view, which recently has been supported by political uncertainty from US and Europe. Though, the recent bond market rally has been partially offset by President Trump’s tax cut talk on Thursday. Our scorecard is neutral once again this week, which suggests generally balanced tactical factors. Therefore, next week bond market is likely to be event driven: we think inflation data and Yellen’s testimony are the key events ahead. Our preferred duration expressions are 30-year TIPS long or being long the belly of 2s7s30s fly. Also next week, several regional Fed presidents (Lacker/Kaplan/Lockhart/Rosengren/Harker) are due to speak. On Feb 16th, the Treasury will announce the auctions details of 2y/5y/7y USTs (Forecasted amount: $26/34/28bn; We see fair-value of WIrolls: 2.2/1.6/0.4bp,). The key data ahead are US January CPI, PPI and Industrial Production. For interest rate volatility, we recommend selling ATM+/-50bp wide 6m5y strangles.

10yubs

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