Can economic growth rebound like previous cycles? Renewed growth would result in diminished foreign demand for long treasuries and drive sovereign spreads wider as a result.
Our preferred vehicle for looking wider remains the US / UK 10 year spread. Probabilities are very high at 94% for containment between 26.8 to 44.9 bps. Initial target for widening would be fair value currently at 35 bps.
Quick read: Currency markets defied expectations in 2016 when the Bank of Japan and European Central Bank watched their currencies strengthen after their latest easing measures. The Yen in particular strengthened despite a weakening economy, capital outflows and the...
Since 2015 a return to economic data misses has coincided with Canadian $ weakness and Canada/US 10 year spread widening.
Yield change forecasts indicate 5 years are likely to under-perform with a rise of +12.6 bps versus +8.8 bps for 10s and +9.0 bps for 2s. This forecast would suggest the 2y5y10y butterfly could rise to -1.7 bps.
The NFIB’s Small Business Optimism Index continues to fall since peaking December 2014. Hiring and compensation components of this index had been shining lights suggesting rising wage growth until dimming in 2016.
Risk adjusted performance is at extremes relative to high yield and USTs. A rebound in UST yields would likely not treat munis kindly. Additionally, a bullish seasonal fades in March.