US Rates: Expect narrow ranges to continue – HSBC

According to Lawrence Dyer, Strategist at HSBC, there is a risk that a new, hawkish Fed Chair could cause a shift to a higher yield range. However, the front-runners seem to have views near the current Fed rate path consensus, he further adds.

Key Quotes

“Furthermore, White House Chief of Staff John Kelly said a decision on who will be the next Fed Chairman was “some time away” (Bloomberg, 12 October 2017). So, this should not be a factor in the near term.”

“Our short-term themes are focused on the Fed outlook and its impact on the yield range and curve slope. For example, we expect mean reversion to continue for trading range patterns for periods from one day to three months. Our near-term range for the 10-year note remains 2.15-2.40%. This 25bp range is consistent with the typical monthly range since the end of QE.”

“Our longer-term themes are structural. For example, one theme is JGBs swapped into US Dollars. Japan’s exporting corporations earn USD revenue, have JPY costs, and must protect their profits from potentially large, unfavourable currency swings. The cross currency basis was near zero before the financial crisis. Now, JGBs offer significant yield pickups to Treasuries (+64bp) and are as much as 40bp cheaper than comparable maturity high-quality bank debt. This reflects the increased cost of balance sheet usage, not increased risks. So, real money investors can profit by disintermediating the banks in the three-month to three-year sector.”