BofA Merrill Lynch is advising clients to purchase Treasury securities.
"We recommend a tactical long on the [5-year] banking concern annotation to seat for a [10 to xv Earth point] reject inward rates over the coming weeks," write BofA involvement charge per unit of measurement strategists Priya Misra in addition to Shyam Rajan in addition to technical strategist MacNeil Curry inward a banking concern annotation to clients. "A combination of headline risks to a greater extent than or less the continuing resolution, dovish Fed speak, a possible Yellen nomination compounded past times brusque positioning in addition to technicals inward the marketplace could Pb us lower inward yields over the coming 2 weeks. Note that this is a tactical merchandise in addition to nosotros nevertheless maintain our persuasion of rates heading higher past times yr end."
The strategists initiated the merchandise at a 1.45% yield on the 5-year Treasury note, targeting 1.3%. (Right now, the 5-year yield is at 1.42%.)
Misra, Rajan, in addition to Curry expand on the 5 drivers of the trade:
- Fiscal headlines. "We mean value the chances of a brief shutdown after September xxx has increased," says the BofA team. "More importantly, the marketplace sensitivity to financial headlines is probable to convey increased given that the chairman explicitly mentioned the upcoming financial policy decisions – every bit a crusade for concern."
- Possible Yellen nomination. Misra, Rajan, in addition to Curry mean value the nomination of Janet Yellen to supercede Ben Bernanke inward the top spot at the Federal Reserve is close. "Recall that inward a oral communication final year, Yellen prescribed keeping the Fed funds charge per unit of measurement closed to aught until piece of cake 2015 in addition to at nigh 2% past times the halt of 2016," tell the strategists. "This would hold upward fifty-fifty to a greater extent than dovish that the SEP released this week."
- Dovish Fed speak. BofA points to a oral communication past times New York Fed president in addition to influential FOMC fellow member Bill Dudley, who on Monday said he voted non to taper because he didn't run into sustainable improvement in the project marketplace yet. "This continues to highlight the relatively high threshold (high when compared to what was previously thought) for the Fed to taper," tell Misra, Rajan, in addition to Curry. "Speeches past times Evans in addition to Rosengren afterwards this calendar week are too probable to re-emphasize this point."
- Short positioning. The latest survey in addition to CFTC information showed a buildup inward brusque positioning inward Treasuries heading into final calendar week (charts below). "The combination of the Summers withdrawal in addition to the dovish FOMC is probable to convey helped reduced some of this brusque base," says BofA. "However, in that location may hold upward some to a greater extent than brusque covering, every bit the marketplace re-evaluates recent weak information that it has arguably ignored (as tapering for September was idea to hold upward a done deal) inward the context of a dovish Fed."
- Technicals. BofA asserts that in that location is nevertheless momentum to the post-FOMC cost activity inward Treasuries from a technical standpoint. "Treasuries convey turned close term tendency from bearish to bullish alongside 5yr yields educate to operate past times on lower inward the sessions in addition to weeks ahead," tell the strategists. "We facial expression for a force towards the 1.273%/1.224% resistance zone, earlier renewed basing."
Of course, in that location are risks that could derail the trade, every bit Misra, Rajan, in addition to Curry admit.
"Stronger than expected information in addition to relatively benign financial negotiations are risks to this trade," they write. "However, the underpinning of a delicate recovery in addition to a dovish Fed that is inward no hurry to taper Pb us to believe that the risks to a sudden ascent inward rates inward the coming weeks is small."
The charts below demo brusque positioning indicators.
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