(18 September 2019) DAILY MARKET BRIEF 1：Closing underweight in 2-year US Treasuries

While the position netted a modest gain, we see further profit potential as limited. We now believe the Federal Reserve will be willing to cut rates more decisively than we expected when we adopted the trade in early June because its outlook for US growth has moderated. In addition to the July cut and the likely one on 18 September, more rate reductions are possible next year should all announced tariffs be implemented. Given this, and how close the 2-year yield will be to the Fed funds rate after the next cut, we do not expect the yield to rise much further.

In addition, with the 2-year yield approaching the cash rate, the income produced by an underweight 2-year position versus cash has become marginal, and we do not believe the carry and roll down of around 15 basis points we expect over the next six months is sufficient to justify the risks of the position. So we are closing this position.