It is time to start fading the long-end driven fixed-income rally. Fed hikes are drawing closer, growth is picking up and positioning has become more square following a short squeeze in long-end USD and EUR steepeners.
We have revised our view on the Fed and now expect the first hike in April instead of mid-2015, leaving room for higher US rates. We see more value in paying in the 10-Year-us15-Year segment than in the 2-Year segment.
Higher US rates will be accompanied by a steeper EUR curve. Part of the recent flattening has been driven by lower US rates and it still remains possible that the ECB will succeed in boosting growth and inflation expectations.
Recommendations
New: Pay 10Y USD swap 4Y forward. Scale in with ½ position at 3.72% and next half below @ 3.50%. Target 4.20%, Stop 3.30%, 3M roll down -2.5bp.
Add: Add a ½ position to 2-15 1Y forward EUR steepener initially opened following the June ECB meeting. The position is added @ 153.5. Average entry is then 161.75bp. Levels unchanged with stop @ 139bp and target @ 200bp. 3M roll -0.25bp.
Hold: Keep the positions of paying 15Y15Y, long 15Y15Y payer spread, paying 5Y EUR inflation swap, selling 1Y1Y EUR/USD CCS basis.
To Read the Entire Report Please Click on the pdf File Below