[PPT] - US Rates Strategy US Rates Outlook: The Calm before the Storm Ian PowerPoint Presentation

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US Rates Strategy

US Rates Outlook: The Calm before the Storm

Ian Lyngen, CFA Head of US Rates Strategy Ian.Lyngen@bmo.com 212-702-1703

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Our Call: Structurally Lower for Longer

Source: BMO CM

Q1 '20 Q2 '20 Q3 '20 Q4 '20 2s 1.60 1.55 1.10 1.05 2s/10s 0.40 0.40 0.20 0.45 5s 1.80 1.70 1.20 1.20 10s 2.00 1.95 1.30 1.50 30s 2.35 2.30 1.60 1.75 5s/30s 0.55 0.60 0.40 0.55 2s/10s/30s 0.05 0.05

0.10

0.20 2s/5s/10s 0.00

0.10

0.00

0.15

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Fed’s Dimming Economic Outlook

FOMC 2019 2020 2021 2022 Long-Run GDP 2.20 2.00 1.90 1.80 1.90

Sept Est.

2.20 2.00 1.90 1.80 1.90 Core-PCE 1.60 1.90 2.00 2.00

Sept Est.

1.80 1.90 2.00 2.00 UNR 3.60 3.50 3.60 3.70 4.10

Sept Est.

3.70 3.70 3.80 3.90 4.20 Fed Funds 1.60 1.60 1.90 2.10 2.50

Sept Est.

1.90 1.90 2.10 2.40 2.50

Source: FOMC, BMO CM

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Trading the 10-year Yield Range in 2020

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Seasonals are a Key Factor in Our Near-term Bias

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Rolling Fed Expectations Will Imply Deeper Cuts

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1990s: A Dated Guide to ‘On Hold’

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Financial Conditions Much Easier in 2020

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Volatility Drives Financial Conditions

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Fed’s Curve Preference

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Fed’s Recession Odds Still ‘High’

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Recessions are Not Always Obvious at the Time

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Negative Yields Persist Overseas

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Under-Confidence Risk

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CEO Confidence Dropped

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Falling Confidence Lowers Spending

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Election Event Risk

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Trump’s Reelection Odds Improving

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Sanders Leads for Democratic Nomination

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Above Average Growth Sustainable?

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Trade Remains a Wildcard due to Tariffs

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Is the CapEx Boom Over?

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Inventory Drag – Big Bet on Consumption

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Inventories Building Faster than New Orders

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Housing Finally Adds to Domestic Growth

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Non-Mortgage Interest Payments Spike Ahead of Recessions

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Importance of Student Debt and Auto Loans

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Auto Loan Delinquencies Near Crisis Peak of 5.27%

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<35 Year-old Homeownership Hit Hardest

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Real Wage Gains Sliding

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Home Buying Conditions more than just Mortgage Rates

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Year-over-Year Core Peaked in 2018

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Core Inflation Underperforms Fed’s Expectations

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Shelter a Key Positive Contributor to Inflation

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Japanese Investors Back in Treasuries

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Hedge Adjusted 10-year Yields Bottomed?

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