US Rates: Are we there yet? - TDS

Analysts at TDS forecast a modest increase in US 10yr rates over the coming year as Treasury ramps up issuance to fund Fed portfolio runoff. However, their 10yr forecast at 2.65% by the end of 2018 is below the consensus forecast of 3%.

Key Quotes

“We initiate 3m10y payer spreads financed by selling 3m10y OTM receivers. We also forecast a flatter curve as the Fed hikes twice but the long-end stays more anchored.” 

“Foreign demand should remain a strong source of support for duration given likely continued reserve growth and low global bond yields. Even though supply will pick up, we only see a 20bp rise in term premium in 2018.” 

“We also see wider 30yr swap spreads and a steeper 5s30s swap spread curve as higher Treasury issuance should tighten belly spreads while bank deregulation should widen long-end spreads. We like being long June 2018 FRAOIS due to the risk of funding stress given potential repatriation and continued shrinkage in bank excess reserves. We initiate 2s10s Libor-FF basis curve steepeners as the end date of Libor draws closer.”