Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
Head of Fixed Income Strategy
Summary: Besides the US election, Treasuries will be sensitive to the Treasury's quarterly auction plan, the Federal Reserve meeting and jobs data. We believe that there is space for Treasuries to rally today and tomorrow with the 10-year Treasury yields falling as much as 5bps, while the 30-year Treasury yields have the potential to fall by 15bps. As soon as the risk-off sentiment wanes, we will see the US yield curve resume steepening faster than expected.
It's not all about the US election
It is going to be an intense week because there are decisive events for the bond market beside the US elections. On the very next day after the election, the US Treasury unveils its quarterly bond issuance plan, following which, on Thursday, there will be the FOMC meeting. Volatility is undoubtedly going to be high; however, it is tough to understand how it will unfold. Even though in the long-term, it is clear that the US yield curve will continue to steepen, in the short-term, there might be a sensible fly to safety that can push yields lower.
Amid a contested election, a rally in Treasuries will be most likely be reinforced by investors unwinding their large short positions in Treasury futures.
Looking at the 10-year Treasury yields in the graph below, we see that they have been trading in an ascending wedge since August. In case of a fly to safety, we might see the 10-year yields testing the support line at 80bps. At the same time, the long part of the yield curve will experience the majority of the volatility, and the 30-year Treasury yields can fall as much as 15bps.
The Treasury's quarterly bond issuance plan, however, might ruin the Treasuries’ rally. If larger bond auctions are expected, but the FED doesn't step up with its bond purchasing program, we might see the US yield curve resuming a fast steepening. Therefore we might see the 10-year Treasury yields testing the resistance line at 90bps.
Overall, there is a lot to gain engaging in active trading strategies. However, it is vital to keep in mind key trading levels which we have highlighted in the chart above as well in an article we published last Thursday.
Coronavirus continues to spread in Europe
In Europe, the market will be focusing on the European Commission’s Economic Growth Forecasts. While coronavirus cases rise across Europe and countries imposes harsher lockdown restrictions, we might see a bleaker economic outlook. Even though the periphery might suffer by harsh lockdowns, we still believe that in the long-run, the ECB will step in, pushing yields in this space even lower. We still favour the 30-year BTPs as they are they trade rich compared to their peers and are positioned to gain the most by a dovish ECB, which is hinting to more than PEPP expansion.
Monday, 2nd November
Tuesday, 3rd November
Wednesday, 4th November
Thursday, 5th November
Friday, 6th November