“Importantly, key resistance at -20bps has been cracked and the market appears to be targeting par,” says Leow in his July 25 note.
Based on market actions, Leow notes that popular trades including being long on tech stocks and the US dollar (USD)/Japanese yen (JPY) are being “unwound”.
Another observation is the lack of flight to safety in US Treasuries despite the risk-off sentiment.
“Typically, we would expect the curve to flatten and the long-end to benefit when stocks head lower. However, this time, the long-end continued to sell off, with 30-year yields up by 8 bps,” he says.
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“Third, the front end got a bid as former New York Fed governor Dudley suggested that the Fed should cut immediately. Note that Dudley has consistently been hawkish and this marks his pivot in the cycle,” he adds.
In Leow’s view, the front end of the curve is likely to be anchored as the US Fed embarks on an easing cycle.
However, he sees that the Fed could go on a shorter and sharper recalibration cycle that sees them cut rates once every meeting over a shorter period if needed.
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“We also note that a fair amount of easing is already priced into the front of the curve,” says Leow.
“For the long end, investors are clearly more opportunistic,” he adds. “30-year US yields below 4.40% does not offer much comfort if the US's fiscal trajectory is likely to worsen and issuances weigh. The term premium needs to be rebuilt. Even the belly tenors may be somewhat vulnerable at these levels and we note that the five-year auction tailed by about 1 bp.”
