These Charts Do NOT Scream “Ready For Super Aggressive Fed”

We don’t want to sound like a broken record, but remember on Sunday evening when we quoted Barclays on the way to saying that everything is selling off together?

Yeah well that’s still going on. Or at least the general drift is still in that direction. Here’s Treasurys versus the Dow:

DowBonds

And here’s IG (a lot of supply news today on expectations that this week would be front- loaded due to weather forecast calling for a blizzard) versus rates:

RatesIG

And then panning out, the picture looks like this…

ESUSTs

And this…

PanOUt

And this…

PanOut2

That doesn’t look like a market that’s ready for rapid policy normalization to us. In other words, they need to be really, really careful about what they telegraph on Wednesday. 

In any event, here’s a wrap of Street opinion on USTs, via Bloomberg…

  • BofA (strategists including Shyam Rajan)
    • Remain bearish, expect 10Y yield to test 3% by mid-year
    • 3Y sector “has most to lose” in bearish scenario as “a trend of a consistently more hawkish Fed has been established since December,” should drive term premium higher in front end
    • Swap spreads should widen as corporate issuance declines during second half of month; MORE
  • Barclays (strategists including Rajiv Setia)
    • Unwind 2Y swap spread tightener given widening risk for Libor-OIS; instead, sell 2Y Treasuries and receive OIS
    • Expect reversal of recent tightening in 3m OIS, which has repriced to a more aggressive Fed at faster pace than 3m unsecured fund rates have; this would alleviate pressure on the 2y Libor-OIS basis, the main driver of spread tightening
    • European political risk may also widen Libor-OIS
  • JP Morgan (Jay Barry, Phoebe White and Bruce Sun)
    • Remain bearish duration bearish ahead of FOMC, favoring 2s5s steepeners
    • Expect median dots to indicate 4 rate increases this year vs from 3 in December, 3 increases in 2018, unchanged, with risks titled to 4
    • Faster normalization pace should accelerate Fed balance- sheet adjustments
    • In RV, favor selling 9s on 6s9s25s fly as sector appears 3bp too rich relative to drivers
  • Citi (Jabaz Mathai and Jason Williams)
    • Low likelihood of market pricing in four hikes this year; rates selloff should pause, and a rally is possibly aided by positioning that “is quite short”
    • Pricing in four rate hikes might initially flatten the curve, as in 2004-2006, however potential for fiscal easing “should insert a steepening dynamic into the curve”
    • Forward volatilities implied from eurodollar options “look fundamentally cheap”; recommend buying EDM8 98.125 straddles vs 0EM7 98.125 straddles, notional neutral, “to buy synthetic forward vol at attractive levels”
  • Nomura (George Goncalves and Stanley Sun)
    • Expect dovish March hike with Fed dots largely unchanged; would lead curve to bull steepen from 3Y-5Y sector to long end
    • 5Y sector is ’’sweet spot’’ for carry and rolldown in scenario that Fed hike path in 2018-2019 is slower than 2017
    • In USD vol, position for dovish March hike via buying USD 200mm 6m2y 1×1 receiver spread at 11.5bps, target 30bp
  • Morgan Stanley (strategists led by Matthew Hornbach)
    • BMIs remain bearish USTs; keep short 5Y UST outright position
    • Break higher in yields has potential to extend net by Japanese investors of non-yen bonds
    • Recommend buying EDZ8 midcurve puts vs EDZ7 puts; trade benefits if Fed dots forecast more than two rate increases in 2018
  • TD Securities (strategists including Priya Misra)
    • Sell 2Y USTs vs OIS; expect higher Libor on faster rate- hike timing, while Treasuries should cheapen vs OIS into debt ceiling reinstatement
    • Long 10Y USTs targeting 2.4%; MORE
    • Further curve flattening may be limited given market pricing in more than 2.5 rate hikes for 2017

 

 

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