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Georgia Elections: Weaker Dollar And Tsys In Dem Sweep (3/3)

MARKET STRATEGY
  • BMO FICC thinks that in a Dem sweep, initial response would be upside for risk assets, with higher inflation expectations. But "the degree to which this translates to higher nominal yields presents a central debate for Q1. Building inflation expectations facing off against the potential for the FOMC to deliver a WAM extension is a recipe for lower real yields if nothing else." First target for 10s is 98.4bps and then 1%, but, all in all fiscal aid repricing will not be sufficient for more than a 15bps repricing in 10s. 30s could hit 1.80% and breakevens could move through 205bps.
  • In Republican win, would see bull flattening in Tsys with downside in risk assets (all within ranges).
  • Citi sees a Dem Sweep as potentially bringing another $500bn to the existing $900bn package and "add to reflation themes, at least for UTs." Their "bias" is for the Republicans to win at least one seat however, and if this happens "this could see a tactical bid back into USD. But a blue wave sweep still carries a more medium term risk to the fundamentally bearish USD outlook in that this may ultimately see looser fiscal spending ... at a time when the Fed is ready to taper its QE program by September 2021. This could translate to higher US real yields and strengthen USD."
  • They also note further potential for widening of the UST/Bund spread, given European lockdowns and ECB policy.
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