TD Enter Long 5s

Friday saw TD Securities recommend a long 5-Year Tsy position, with an entry point of 93bp, targeting 80bp, with a stop at 105bp (100K DV01). TD noted that "we enter after a much stronger than expected jobs report sent 5y rates sharply higher as the market pulled forward the first Fed hike to January 2023. The bar for the Fed to hike rates remains high as the Fed needs to see an inflation overshoot and an inclusive labor market recovery. This would require substantial labor market improvement over a longer period in our view. In addition, given the need for the Fed to complete tapering before hiking rates (which can take the better part of a year), we think the market is overpriced for a risk of an early Fed hike. We continue to expect the Fed to hike in September 2024. Even in the most optimistic scenario, we think the earliest that the Fed could hike would be December 2022. If we assume a terminal rate of 2.5%, the fair value for the 5-Year should be 1%. Much of the repricing in the 5-Year is behind us, which can bring in demand from international investors and pensions. With 3-month carry at 4.5bp, the 5-Year remains the most attractive point on the curve for longs. The risks to this trade are 1) convexity hedging, which can bring paying needs in the belly of the curve and 2) mutual fund outflows given the negative total return in bond funds."