US Rates: A perfect storm - TDS

Analysts at TDS point out that fears about a deceleration in US growth, the French election and geopolitics have dominated the rates market in recent weeks, making it the perfect storm for the markets.

Key Quotes

“Price action has been dominated by the repricing of Fed expectations, which we think are much too pessimistic. We do not see the weak CPI and retail sales reports as being the start of a new trend of weaker US growth. Given the near term risk of a US government shutdown and a French election surprise, we initiate a 1m5y payer spread as a limited downside way to position for higher rates driven by a repricing of Fed policy.”

“10yr term premium has also declined in recent weeks but remains 30bp above pre-election levels. While term premium can rebound somewhat if there is no French election surprise and geopolitical concerns subside, it is unlikely to rise much until we see signs of real progress on tax reform.”

“Treasury asked dealers for feedback on ultra-long issuance. We think these are very early stages of gathering market intelligence and even if the feedback is positive, an ultra-long issue may not be brought to market for 1-2 years. We do not believe that there is much passive demand from long-end investors. Due to convexity benefits, a 50yr Treasury should theoretically trade through the 30yr. However, Treasury may need to pay significant concession to issue much ultra-long end paper. If funding needs rise sharply in coming years (due to fiscal stimulus and/or Fed portfolio runoff) Treasury may wish to reconsider ultra-long issuance.”