Monday, 27 September, 2021
**BANK VIEWS UST**
{US} **BANK VIEWS UST**
• BofA (Mark Cabana, others, Sept. 24 report)
o Factors that helped drive past week’s selloff included less-short positioning, Fed taper clearing a path toward rate hikes, improving economy and progress on an infrastructure bill
o However “any sell-off is likely to be capped by strong domestic real money & overseas demand”
o Favors near-term carry trades for limited near term upside; expects steeper 2s10s and flatter 5s30s as more hawkish Fed drives belly underperformance
o Favorite trade for Fed taper and hawkish Fed is higher 5Y real rates; taper supports this as coupon auction size cuts are likely to be only in nominals
• Barclays (Anshul Pradhan, others, Sept. 23 report)
o Recommends long position in 3-year Treasuries at 0.485% as front end “has overreacted to the dots and the tapering timeline” by pricing in a hike by the end of next year
o Continues to recommend being long 20-year bonds vs 10-year notes and 30- year bonds on asset-swap fly at 21.5bp
o Auction demand and liquidity in the 20-year “has improved recently” and supply is likely to decline more, while Fed buying in the sector will continue if issues remain cheap on the spline
• BMO (Ian Lyngen, Ben Jeffery, Sept. 24 report)
o With 10-year yield having breached 1.42%, next target range is 1.55%-1.60%, “and the only potential hurdle is dip-buying interest as the global growth profile continues to be negatively impacted by the lingering ramifications from the pandemic”
o Still, a return to 1.25%-1.35% by year-end “would be consistent with a more hawkish Fed that’s demonstrated a willingness to pull forward rate hike assumptions in response to higher-than-expected realized inflation”
o 5-year “is a much different animal” as Fed moves toward tightening; 4Q range is likely to be 1%-1.05%
• Citi (Jabaz Mathai, others, Sept. 24)
o Bear steepening in the yield curve a day after the Fed was driven by a reconsideration of taper, “namely the necessity for the curve to have some meaningful term premium after the rapid decline in Q2”
o The “taper term premium argument, if we are right, means that there is more to go in the selloff”
o Curve will probably steepen in the near term in 2s10s as investors incorporate more term premium into taper announcement
• Soc Gen (Subadra Rajappa, others, Sept. 23 report)
o With coupon supply expected to decline in FY22, “Fed tapering of asset purchases and reduced demand for Treasuries from the Fed should not have a meaningful impact on net supply that the market has to absorb,” thus impact on yields from an announcement should be minimal
o Still, “Treasuries look rich to fundamentals and yields should gradually rise as the economy rebounds and Fed removes monetary policy accommodation”
o There’s “more room for market pricing of hikes to drift toward the Fed median dots over time” because of “higher risks of persistent inflation”
• TD Securities (Priya Misra, others, Sept. 24 report)
o Recommends owning UST 5- year at 0.905%, with intention to add more if yield exceeds 1%, targeting 0.70% with a stop at 1.02%
o Sector “offers some of the best carry and roll on the curve,” as Fed is unlikely to raise rates before December 2023 and taper impact will be partly offset in front end by coupon auction size cuts expected in November
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