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US Treasury: Navigating curves, steeper as we start, flatter as we go on – Goldman Sachs

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Dec 31, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    FXStreet (Delhi) - Research Team at Goldman Sachs, suggests that since the lapse of forward guidance and the first talk of tapering in early 2013, 2-year rates in the US have risen from about 25bp to around 1% currently.

    Key Quotes

    “The first hike has shifted the focus towards a potentially steep path of successive hikes (such as the 25bp hike per quarter path embodied in our US team’s forecasts) and allows a rebuild in the term premium, especially if ‘lift-off’ comes alongside stronger US activity and a repricing of inflation expectations. Such a bear steepening would be much more painful for EM assets.”

    “EM curves did not flatten as aggressively as the G3 curves in the summer, but the average level of steepness in EM curves is not much higher currently than at the time of the ‘taper tantrum’ in 2013. So long-end rates in EMs with flat curves could see the most pain, with currencies underperforming as well if the move extends. Among the low-yielders, CZK, PLN, HUF and MYR rates, and among the high-yielders, IDR and TRY may be most vulnerable. Curves in CEE (HUF, PLN, CZK) may be especially exposed if monetary policy authorities continue to add accommodation despite a reflationary macro backdrop.”

    “However, the continued bid for duration from the ECB and the BoJ – and we expect a further augmentation of quantitative easing by both central banks in coming months – should limit the degree of EM-unfriendly curve steepening. Moreover, as the tightening cycle progresses, we would expect the term structure to flatten – either because continued above-potential growth causes the market to price a faster pace of hikes at the front end, resulting in a bear-flattening, or because growth slows modestly and a bull-flattening ensues. The latter case, provided US growth does not slow too sharply, has historically been the most EM carry-trade friendly.”
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