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Corrective Cycle


Trend Signals Still Point North


BLOCK, Red Pack


Corporate Debt Recap, World Bank Exp Wednesday

Rabobank Enter 5s30s Futures Flattener


Rabobank note that they have entered a 5s30s flattener (in futures). The spread at entry was 122bp, target 80bp, stop 140bp. "This position is based upon our firm opposition to the notion that Powell's acknowledgement last week that the Fed will tolerate higher inflation is set to prompt a steepening of curves globally. This is based upon a number of considerations not least of which is the fact that accepting higher inflation does not in itself result in increased price pressures. In fact, such a move rather risks underlining the Bank's inability to meet its inflation target. The BoJ is a case in point here having formally targeted an inflation overshoot in September 2016 – the ineffectiveness of which is perfectly exemplified by the fact that Japanese breakevens are currently projecting zero percent inflation over the next decade. Crucially, rather than being an outlier as may have been believed in recent years, we believe Japan is a template. This as extraordinarily easy policy setting now adopted by central banks across the globe paradoxically prevents the build-up of inflation pressure they are hoping for, in our view, as free money serves to cannibalise demand away from the real world in favour of non-productive financial assets. When one adds into the mix our view that scarring from Covid in the form of permanent job losses and business closures will weigh on demand meaning the current apparent "V-shaped" recovery is really the first half of a "W", mounting evidence we may be on the cusp of a second wave of the virus, geopolitical tension and social unrest (both of which are being further fuelled by the virus' disproportionate impact on low income groups) and a potentially messy US presidential election then it seems probable to say the least that the current elevated safe-haven bond supply will be more than met with demand going forward. The above points to flatter not steeper curves going forward which is also supported by the Fed's recent shift itself as the lower-for-even-longer rate view stands to reduce policy uncertainty thereby theoretically weighing on long-dated US term premia."