TD Securities Like Being Long 10s

TD Securities note that “the market is pricing in a soft landing, with the "trough rate" at 3.90% and higher term premium. It expects the Fed to remain "higher for longer" and for rates to remain elevated in the near-term, with 1y forwards near current levels at 4.65%.”

• “We disagree with the market.”
• “First, we expect data to deteriorate in the coming months, which will bring rates down as the Fed will need to cut as the economy slips into a recession in Q2 2024..”
• “Second, with the increased trough rate, we think it is difficult for the market to price in even fewer cuts, which should prevent further selloffs. Additionally, the market had difficulty breaking through the psychological 5% level in 10s, which puts a near-term ceiling on yields.”
• “Third, we like the 10y sector as Treasury has slowed the pace of auction size increases in reaction to higher term premium.”
• “While there are other ways to express a long rate view, expressing the view in options is expensive because of higher vol, so we prefer being long nominals.”
• “We also like 10s compared with other sectors because there is less supply pressure than the 20-30y part of the curve.”
• “We think this is an opportune time to start getting into longs, particularly because carry for the trade has recently started to become less negative due to the steepening of the curve.”