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US 10yr treasury yields benefitted from the risk-seeking mood, rising from 2.32% to 2.35%, while 2yr yields rose from 2.29% to 2.30%. Fed fund futures yields also firmed, now pricing a June rate hike as an 85% chance (from around 80% the previous day).
In the US, reflation expectations continue to sputter. The passage of the French presidential election event risk allowed for the mean-reversion of yields towards the middle of the recent range, but continued uncertainty around the US policy agenda, frequent reminders of significant levels of geopolitical risk, and rather mixed data on the economic front did not allow for more than that.
Rate hike expectations have normalized somewhat since the first round of the French presidential election, with three hikes now priced into end-2018 versus only two prior. However, we see scope for a further hawkish repricing of hike expectations.
We favor costless 2y fwd 2s10s bear flatteners as the trade picks roughly 6bp to the forwards. The main risk for the position is a bear steepening scenario for the curve whereby the 2s10s curve in two years time is steeper than the 48.5bp entry level on the position with the.
US Treasury futures rolls: CTDs change from June 2017 to September 2017 for all contracts except the US and the WN contract, implying that the market positioning will be the major influence on the latter contracts. Asset managers are long in all the contracts except the UXY contract. This should be neutral to bullish for the UXY contract and bearish for all the other contracts. Peak roll activity will likely occur relatively early this roll cycle because of the Memorial Day holiday on 29 May.
