BofA: Global Rates Weekly: Wave Theory

Global Rates Weekly: Wave theory

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Global Rates Weekly

  Global Rates Weekly: Wave theory

•  Coronavirus concerns raise macro risk & curve flattening pressure in the US. YCC may see belly outperformance, steeper 10s30s
•  In the EU we recommend 10y swap spread widener, with a balanced outlook for 30y spreads. We remain bullish on front-end rates
•  In AU uncertainty on supply & balance sheet could cheapen 10s on a fly. Italy linker iotas look cheap after recent tightening
The View: we know we don't know what we don't know
We do not know how to assess US state level virus data and the risk of a widespread resurgence of Covid-19 outside the tri-state area. We do know that irrespective of government guidelines, consumer behavior will adjust regardless, which means that we are increasingly concerned about the sustainability of the recovery in the US.
 ─ R. Preusser
Rates: risk of resurgence
US: Coronavirus concerns raise macro risk & curve flattening pressure in the US. YCC may see belly outperformance, steeper 10s30s.
EU: We examine recent dynamics on the swap spread curve. We now recommend a 10y swap spread widener and discuss the rather balanced outlook for 30y spreads.
UK: Post-BoE Gilt curve steepening a positioning wash-out, not a theme. Effective long end supply still light through H2. We regard it as a flattener opportunity.
JY: Interest-bearing JGB trades by domestic private-sector institutions fell to a record low of ¥11.7trn in May. Needing collateral, city banks were big net buyers of TBs.
AU: Uncertainty on both the supply outlook and RBA balance sheet expansion should cheapen 10yr bonds on a 5s-10s-20s fly and support narrow swap spreads.
 ─ Braizinha, Cabana, Axel, Salim, Satko, Capleton, Ohsaki, Sam, Morriss
Front end: prime fund closures
US: Prime fund closures were announced by two large asset managers due to market stress. Wider FRA-OIS would likely occur only if larger prime funds started to liquidate
EU: The magnitude of decline across front-end EUR rates on the TLTRO III.4 settlement date has been limited, but we prefer to maintain a bullish stance on front-end EUR rates
 ─ M. Cabana, O. Lima, R. Man
Volatility: accumulation of risk
We see an accumulation of risk in end '20. Elections may be market positive, but perhaps offset by global pandemic pressures. We continue to favor hedging the positive side of the range of outcomes.
 ─ B. Braizinha, S. Salim
Inflation: 80/20 rule points to old favourite trade
EU: Italy linker iotas look cheap after the recent Italy tightening. This recalls a credit barbell strategy we have suggested before, as benign summer seasonals approach
 ─ M. Capleton