Bank of America21 min
Window dressing
Ralf Preusser, Mark Cabana, Sphia Salim, Agne Stengeryte, Agnes Dengaraita
Earnings Call, Conference Presentation
- U.S. underlying growth is projected to be robust while inflation remains elevated, necessitating further Federal Reserve restraint that may eventually flatten the yield curve.
- U.S. rate movements are highly sensitive to midterm election outcomes, with a Democratic Senate majority (53+ seats) predicted to lower 2-year yields by 5-7 basis points and 10-year yields by 3-5 basis points, whereas Republican outperformance is expected to cause a bear flattening with 2-year yields rising 7-10 basis points and 10-year yields rising 3-5 basis points.
- The Treasury anticipates a potential 40-50% probability of long-end supply cuts at the November refunding, specifically a reduction of $2-3 billion in the 20-30 year sector in the first quarter, driven by elevated risks of auction size reductions and potential forward guidance updates in February.
- Future U.S. gross financing requirements are forecast to increase by an average of $16 billion annually to reach the 2030-31 period, with an additional $20 billion projected for the next fiscal year following Treasury-DMO agreement on the QT process.
- The DMO intends to raise only 6% of its remit via the long-dated gilt bucket this fiscal year and plans to sell over $10 billion in long-dated gilts over the next five months, following $5 billion sold in the prior seven months.
- Cross-financing requirements are estimated to rise from €275 billion in the current fiscal year to €312 billion next year, accompanied by expectations for discretionary borrowing and the launch of 12-month TBOS and TBSRF auctions in January of the next year.
- Bank of England policy expectations include a potential 7-2 vote split in favor of a hold, a dovish communication signaling limited and gradual further tightening, and a market reaction similar to the dovish hike in May 2023.
- ECB policy trajectories are anticipated to remain in a hiking bias until a shift to a pause becomes "likely," potentially following a December hike, with a Reuters article signaling a potential pause after December that may lead to mixed market verdicts.
- French OATs are expected to trade with high correlation to U.S. equities and face a widening spread, with a 5% deficit projected for next year if the current budget format passes, leading to substantial fiscal tightening.
- Svia Salim predicts negative growth surprises or risk-off moves will disproportionately affect the back end and belly of the yield curve until the ECB shifts away from its current hiking bias, while OAT bonds remain at the mercy of global risk assets.
- Long-end U.S. rate movements and potential supply cuts are viewed as highly responsive to negative bond price action, which could further nudge risks associated with long-end reductions.