Four Macro Rates Views – Goldman Sachs
Francesco Garzarelli, Research Analyst at Goldman Sachs, lists down his views in macro rates space.
“1. In the US, there is scope for 2-year yields to continue to climb higher, extending a trend started in 2013. We would regard yield levels at or below 70bp on the benchmark 2-year T-Note as providing a good entry point into short positions. The Fed Fund futures discount at most 50bp cumulative hikes between now and May 2018 – well below what our US team projects, even allowing for downside risks.
2. At the same time, US ‘break-even’ inflation has further room to rise. Our analysis of the most ‘price sticky’ categories in the CPI basket (e.g., services, rents) suggest that core inflation remains on an upward trajectory. We expect it to rise from the current rate of 2.2%. Headline CPI will gradually catch up, as base effects from energy dissipate in the remainder of the year. Our forecast for CPI is 2.4% next year, and above 2% in the following 2 years. For reference, 2-year ‘break-evens’ trade at 1.4% and 5-year at 1.5%.
3. In the Euro area, the slope of the EUR yield curve is too flat between 5- and 30-year maturities (currently at 110bp, using mid-market swaps). Part of the incremental ECB purchases under the QE program will be allocated to corporate credit and regional debt, alleviating the downward pressures on ‘core’ rates. There are signs that national DMOs are responding to low long-end rates by increasing their supply of long-end bonds. Looking only at syndicated deals, the median maturity at issuance weighted by deal size has increased from around 8.5 years to 14 years since the ECB QE started in March 2015 relative to the two years prior. Last but not least, the recovery in nominal GDP is progressing.
4. In Japan the differential between 5- and 30-year JGBs, currently at 50bp, is extremely depressed. This is the result of the BoJ’s ‘pincer move’ of negative rates and increased secondary market purchases of longer-dated bonds. With the launch of a fiscal expansion, and greater central bank accommodation, we see scope for the long end to steepen back, and break-even inflation to rise (10-year break-even, for reference, trades at 30bp).”