20181204-法国巴黎银行-US_curve_flattening_gains_momentum_8页_1mb

US Curve Flattening Gains Momentum Summary

Core Content

This document discusses the recent trend of the U.S. yield curve flattening, emphasizing the role of the Federal Reserve's (Fed) communication and market expectations. It provides an analysis of the Fed's monetary policy stance, the implications of the yield curve movement, and the potential future scenarios based on current economic conditions and market dynamics.

Main Points

Fed Policy and Market Response

• Chair Powell's Speech (28 November 2018): Clarified earlier comments on tightening past neutral, signaling a more patient approach to rate hikes.
• Market Interpretation: The market perceives the Fed as aiming for a "smooth landing" by avoiding raising interest rates to restrictive levels.
• Rhetoric Impact: The Fed's statements have influenced market expectations, with a shift in sentiment following Powell's comments in October and November 2018.

Yield Curve Flattening

• Trend: The U.S. yield curve has been in a secular flattening trend, with recent acceleration.
• 10s30s UST Flattening: The long-end of the curve is expected to flatten further due to low potential growth and LDI (Liability-Driven Investment) demand.
• Key Indicator: The 10-year Treasury yield is seen as a critical factor in the flattening process.

Future Outlook

• Possible Scenarios:
  • If the curve continues to flatten, the economy might sustain growth, allowing the Fed to hike rates further.
  • Alternatively, if the economy slows below potential, the Fed may pause and eventually cut rates, with historical data suggesting a 9–18 month lag between the last hike and the first cut.
• Expected Hikes: Three more rate hikes are anticipated in 2018–2019, with the next expected in December 2018, followed by March and June 2019.

Forward Spread Model

• Fed's Forward Spread Model: The near-term forward spread (6 quarter forward 3m T-bill yield - 3m T-bill yield) is considered a better recession predictor than the traditional 2s10s UST yield spread.
• Current Spread: The near-term forward spread remains nearly 50bp, while the 2s10s spread is approaching 0bp.

Key Information

• LDI Demand: A significant driver of long-end UST flattening, as discussed in previous reports.
• Potential Growth: Expected to remain depressed, which supports the flattening of the yield curve.
• Real Fed Funds vs. Potential GDP: Real Fed funds are not forecasted to reach restrictive levels, indicating the Fed is not signaling imminent tightening.
• Market Sentiment: Equity markets have responded positively to Powell's November speech, suggesting a more dovish tone.

Trade Idea

• Position: Long-end UST flattener (10s30s UST).
• Entry: 20bp.
• Current: 25bp.
• Target: -20bp.
• Stop: 28bp.
• Carry + Roll: -0.5bp per month.

Legal and Disclosure Notes

• Non-Independent Research: This document is not investment research under MiFID II and is intended for marketing purposes.
• Confidentiality: The information is provided on a confidential basis and may not be distributed without prior written consent.
• Conflict of Interest: BNPP and its affiliates may have financial interests in the securities mentioned, including acting as market makers or advisors.
• Regulatory Compliance: The document is subject to various regulatory frameworks and is intended for professional clients and eligible counterparties only.

Conclusion

The U.S. yield curve is flattening due to a combination of Fed policy, economic expectations, and LDI demand. While this trend does not necessarily signal an imminent recession, it reflects a cautious approach by the Fed in managing the economy. The document concludes with the expectation of further rate hikes and a potential future shift towards rate cuts if economic conditions deteriorate.