BMO's FOMC Setup

BMO note that "in the event the Fed delivers on our base-case dovish taper, we'll continue favouring lower rates in the long-end of the curve and the 1.44% 200-day moving-average in 10-Year yields becomes an attractive target. Further out the curve in the long bond, a volume bulge at 1.85% provides meaningful resistance. A consensus tapering of $15 bn/month with conciliatory language would represent the passing of the event risk more so than any particularly 'new' tradable information - still offering a clearing of the path toward a further retracement lower in rates, but with less urgency than a surprise policy pivot. Let us not forget Friday's employment report provides updated fundamentals on the jobs market and with the consensus of 450K, it is clear the market considers the September swoon a delta-inspired anomaly."

• "As a theme, investors have been pressing the 'back to normal' narrative in the wake of the decline in covid cases and the global emphasis on inflation. Our expectations for Q4 were an attempt to re-trade the Q1 cheaper/steeper trend and to some extent this came to fruition. The nuance is that the belly of the curve has borne the brunt of the increased Fed hike expectations - even prior to the recent concert of central banks leaning away from emergency measures. While the dovish taper is constructive for 5s, an opposite hawkish skew - while lower probability - would undermine the belly of the curve and reinvigorate the 5s/30s flattening that has defined the U.S. rates market as of late. This reinforces our constructive outlook for 10s and 30s; with a nod to the steepening bias in the event investors rethink the >50 bp of tightening still priced into fed fund futures for 2022."