VIEW: TD write that "with the Fed...........>

US TSYS: VIEW: TD write that "with the Fed stressing patience & flexibility in

recent days, the rates mkt will be driven more by fundamentals than the notion

of a Fed policy mistake. Much of the decline in rates since Oct has been a

function of term premium due to the combination of declining inflation risk

premium & a flight to quality bid. Our measure of the 10y term premium has

retraced to pre-portfolio runoff levels in '17. Given the high levels of net Tsy

supply in '19 & beyond, we think that term premium is likely to move higher.

However, it will be constrained by the demand for Tsys as a diversifying asset.

On the other hand, rate exp. over a 10y horizon have barely changed in recent

months. We attribute the pricing out of near term Fed hikes as the market

removing the likelihood of an overshoot of the neutral rate rather than pricing

in a meaningful growth slowdown. We believe mkt is modestly underpricing the

Fed. Given our view of rate exp. & term premium, we exp. the 10y to rise to 3%

by the end of the year. We exp. 10y real rates to trade in a 0.9%-1% range. We

initiate 1y5s30s bear steepeners to monetize a pickup in term premium."