UST: Lot of bearish news already in the price - Westpac

Analysts at Westpac suggest that there is a lot of bearish news already in the UST price and Friday’s UST performance was more likely a function of short covering / profit taking ahead of the US long weekend than any sign of a reversal of sentiment or a significant shift in momentum.

Key Quotes

“While there is a lot of bearish news for Treasuries already in the price (higher inflation expectations, a surge in UST supply next fiscal year, ongoing balance sheet reduction, fiscal stimulus, 3 Fed hikes priced-in for 2018, etc) there is little reason to expect a surge in demand or a turnaround in market direction anytime soon.”

“So our view is that we will definitely see a 3-handle on 10yr US yields over coming weeks and we would expect to see sellers into any rallies, especially if there are a few days of consolidation of current levels and a squeeze lower, say toward 2.75%. Even so, as we have noted a couple of times recently, we are not particularly bearish on a medium term basis and would expect good demand for USTs around 3%. With Asia basically out for the Lunar New Year, that demand won’t be evident this week, however and we would expect price action to occur on very low volume.”

“The major risk events this week will be around the Fed, with the FOMC Minutes and a raft of Fed speakers on the schedule. Obviously, the market will assess the speeches for any shift in the consistent message of a gradual tightening cycle thesis. From a risk reward perspective, the shift of most market consequence would be a discernible increase in hawkish commentary, although that is not our expectation.”