12 Jan 2015
Markets starting to get concerned about the US decoupling trade – BAML
FXStreet (Barcelona) - According to the Research Team at Bank of America-Merrill Lynch, the outperformance of US equities and USD, along with falling US treasury yields indicate that markets are starting to get concerned about the US decoupling trade sustainability.
Key Quotes
“Increased equity volatility over the past two weeks and with 10y Treasury yields back below 2%, it would seem that the market is starting to share our concern about the sustainability of the US decoupling trade. What if a disappointing 4Q14 earnings season and weaker January data precipitate a positioning unwind? How should investors hedged against such risk?”
“To us, the rates trade that would most clearly benefit from this scenario is long Treasuries versus Bunds. The spread between 10y Treasury yields and Bunds, currently at 145bp, is near the highest level in 25 years and at levels associated with mean reversion in 1999 and 2005.”
“If the ECB were to ease aggressively on January 22, Bund yields should have more upside than Treasury yields, especially given the USD is likely to rise further against the EUR in this event. In contrast, if the ECB were to disappoint, we could see a general risk-off in which Treasury yields have more room to decline than Bund yields. This means that the trade could do well in either scenario of this upcoming decisive event. We would recommend this trade with a target of 120bp.”
“In FX, we believe increased equity volatility will limit the upside of USD/JPY nearterm. This is why we continue to stand behind our recommendation of selling a 3m USD/JPY 125 one-touch against buying a 6m USD/JPY 125 one-touch that is one of our Top 10 rates and FX trades for 2015.”
Key Quotes
“Increased equity volatility over the past two weeks and with 10y Treasury yields back below 2%, it would seem that the market is starting to share our concern about the sustainability of the US decoupling trade. What if a disappointing 4Q14 earnings season and weaker January data precipitate a positioning unwind? How should investors hedged against such risk?”
“To us, the rates trade that would most clearly benefit from this scenario is long Treasuries versus Bunds. The spread between 10y Treasury yields and Bunds, currently at 145bp, is near the highest level in 25 years and at levels associated with mean reversion in 1999 and 2005.”
“If the ECB were to ease aggressively on January 22, Bund yields should have more upside than Treasury yields, especially given the USD is likely to rise further against the EUR in this event. In contrast, if the ECB were to disappoint, we could see a general risk-off in which Treasury yields have more room to decline than Bund yields. This means that the trade could do well in either scenario of this upcoming decisive event. We would recommend this trade with a target of 120bp.”
“In FX, we believe increased equity volatility will limit the upside of USD/JPY nearterm. This is why we continue to stand behind our recommendation of selling a 3m USD/JPY 125 one-touch against buying a 6m USD/JPY 125 one-touch that is one of our Top 10 rates and FX trades for 2015.”