News and events

05.02.2024

UST - THE TIME TO ACT

Against this backdrop, we continue to see near-term risk and reward, with the potential upside greater than the potential losses. Accordingly, we remain buyers in times of We turn tactically moderately LONG. We recommend accumulation in the 4.60-4.70% area (10Y). However, we prefer shorter maturities, specifically 5 years.

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Although further upward revision of monetary policy expectations are not negligible, we find current levels appealing for the following reasons:
  1. Carry offers good protection in the event of sell-offs, provided yields (5Y/10Y) remain within 5.10-5.20% (higher than the peaks in October). To get there, the market should at least price out rate cuts entirely for 2024 (not our baseline).  
  2. The recent FFR repricing-led sell-off appears to be overpriced. Beta between FFR future Dec24 and 10Y/5Y UST yields surged to 80% (the highest since November and above LT average of 60%).
  3. Breakeven rates are close to this cycle's highs owing to geopolitical tensions. Unless tensions escalate further, current levels look stretched.
Meanwhile, we increase the threshold to 4% (from 3.8%) for taking profit in case of a rally. 
Strategically, we remain OVERWEIGHT for the following reasons:
  1. The labor market continues to re-balance, which should ease underlying inflationary pressure.
  2. Assuming shelter and core goods price momentum does not accelerate again (our baseline), returning supercore momentum to the pre-COVID level may not be as out of reach as headline data would suggest. 
  3. We remain of the opinion that the Fed will cut rates this year by 50bp starting in H2.
  4. We expect the Fed to slow down QT already from H2, a factor that will contribute positively to the demand/supply balance of USTs.
Against this backdrop, we continue to expect yields at the end of 2024 to be lower than current levels. However, we remain of the opinion that the scope for a decline appears to be limited. 

Chiara Cremonesi
Senior Rates Strategist
Investment Research


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