US Rates Strategy US Rates Outlook: Redefining the Trading Range - - PowerPoint PPT Presentation

US Rates Strategy

US Rates Outlook: Redefining the Trading Range

Margaret Kerins, CFA Head of Fixed Income Strategy Margaret.Kerins@bmo.com 312-931-5038 Ian Lyngen, CFA Head of US Rates Strategy Ian.Lyngen@bmo.com 212-702-1703

1

Two Main Divergences in Market

1.

Massive fiscal and monetary stimulus have pushed investors out the risk curve. If the economy needs additional support, the government and Fed will expand programs to support a strong recovery.

• Fed – “not even thinking about thinking about raising rates”
• Will not hold back on working toward full employment and price stability

even in the face of perceived asset bubbles.

2.

There is real economic destruction and longer-term impacts due to the shutdowns and social distancing. The damage is unknown, but a day of reckoning is on the horizon.

Current State of Markets

Source: BMO CM

2

Market Levels & Issuance Trends

Source: BMO CM, GSEs, SSA, Bloomberg

50 100 150 200 250 300 350 400 2,000 2,200 2,400 2,600 2,800 3,000 3,200 3,400 3,600 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 bp Index S&P 500 Index (LHS) IG Corporate Spreads (RHS, Inverted)

Net Issuance - GSE & Washington Based SSAs Equity Market & Investment Grade Corporates

6/22/2020 YTD Chg Last vs Low 6/22/2020 YTD Chg Last vs Wides 6/22/2020 YTD Chg Last vs Wides 2yr 0.19

• 1.38

0.05 8 3

• 29

15 3

• 26

3yr 0.21

• 1.40

0.03 10 4

• 26

12 3

• 23

5yr 0.33

• 1.36

0.03 23 17

• 27

21 12

• 17

UST (Yld) US Agy (Bp) Global SSA (Bp)

• 100
• 50

50 100 150 200 DNs Bullets Callables FRNs Ex SOFR SOFR FRNs $Bn GSEs & IBRD, IFC, IADB

YTD 5/31/20

3

Fiscal and Monetary Stimulus Summary

Source: BMO CM, NY Fed

4,169 1,546 1,919 547 1,000 2,000 3,000 4,000 5,000 6,000 7,000 6/17/20 Holdings Chg since 3/11/20 $Bn UST Agy MBS 500 1,000 1,500 2,000 2,500 3,000 Total New Facilities $Bn 6/17/20 Holdings Potential Maximum Size

 Half of the $3.6 trillion in fiscal stimulus has been deployed. For the CARES Act specifically,

$1.5 trillion of the $2.7 trillion has been deployed (6/18/20).

 Fed has $2.6 trillion in capacity remaining in its liquidity and credit facilities.  Fed has purchased $2.1 trillion in UST and agency MBS, increasing SOMA holdings by 52%

since March 11th (6/17/20).

4

 The Fed currently owns 27% of UST coupons outstanding.  After Fed purchases, net Tsy coupon issuance totals -$1.3 trillion since QE began on March 16.  Currently, the Fed is committed to purchasing $80 bn UST per month and $40 bn MBS per month.  UST Coupon issuance is projected at $424 bn next quarter. However, after Fed purchases there will

be $184 bn available for the market. This compares with average net coupon issuance in 2018 and 2019 of ~$360 bn per quarter.

Fed Purchases in the Context of the Market

Source: BMO CM, US Treasury, NY Fed

• 400
• 300
• 200
• 100

100 200 300 400 3/20/20 3/27/20 4/3/20 4/10/20 4/17/20 4/24/20 5/1/20 5/8/20 5/15/20 5/22/20 5/29/20 6/5/20 6/12/20 6/19/20 $Bn Net Net Bill Issuance Net Net Coupon Issuance After Fed

• 1,500
• 1,000
• 500

500 1,000 1,500 2,000 2,500

• 1,500
• 1,000
• 500

500 1,000 1,500 2,000 2,500 3/20/20 3/27/20 4/3/20 4/10/20 4/17/20 4/24/20 5/1/20 5/8/20 5/15/20 5/22/20 5/29/20 6/5/20 6/12/20 6/19/20 $Bn $Bn Cumulative Net Bill Issuance after Fed Cumulative Net Cpn Issuance after Fed

5

Fed’s Dimming Economic Outlook

FOMC 2020 2021 2022 Long-Run GDP

• 6.50 5.00 3.50

1.80

Dec Est.

2.00 1.90 1.80 1.90 Core-PCE 1.00 1.50 1.70

Dec Est.

1.90 2.00 2.00 UNR 9.30 6.50 5.50 4.10

Dec Est.

3.50 3.60 3.70 4.10 Fed Funds 0.10 0.10 0.10 2.50

Dec Est.

1.60 1.90 2.10 2.50

Source: FOMC, BMO C

6

Trading the 10-year Yield Range in 2020

7

Rolling Fed Expectations Confirm Lower for Longer

8

Financial Conditions Much Easier

9

Volatility Drives Financial Conditions

10

Election Event Risk

11

Biden’s Election Odds Improving

12

New Growth Normal?

13

Global Business Sentiment Bottoming?

14

Surprise Indices for US and World Economies

15

Real Wage Gains Misleading

16

Corporate Receipts Drop on Tax Reforms and Recession

17

Year-over-Year Core Peaked in 2018

18

Shelter a Key Positive Contributor to Inflation

19

Autos: Driving Modest CPI Volatility

20

Apparel: Transitory or Just Volatile?

21

Domestic Buyers Stepping Up in Treasuries

22

Hedge Adjusted 10-year Yields Bottomed?

23

Japanese Investors Mixed in Treasuries

24

China Continues Selling Treasuries

25

These materials are confidential and proprietary to, and may not be reproduced, disseminated or referred to, in whole or in part without the prior consent of BMO CM (“BMO”). These materials have been prepared exclusively for the BMO client or potential client to which such materials are delivered and may not be used for any purpose other than as authorized in writing by BMO. BMO assumes no responsibility for verification of the information in these materials, and no representation or warranty is made as to the accuracy or completeness of such information. BMO assumes no obligation to correct or update these materials. These materials do not contain all information that may be required to evaluate, and do not constitute a recommendation with respect to, any transaction or matter. Any recipient of these materials should conduct its own independent analysis of the matters referred to herein. “BMO CM” is a trade name used by BMO Financial Group for the wholesale banking businesses of Bank of Montreal, BMO Harris Bank N.A. (formerly Harris N.A.) and Bank of Montreal Ireland p.l.c, and the institutional broker dealer businesses of BMO CM Corp. and BMO CM GKST Inc. in the U.S., BMO Nesbitt Burns Inc. (Member – Canadian Investor Protection Fund) in Canada, Europe and Asia, BMO Nesbitt Burns Securities Limited (registered in the United States and a member of FINRA), BMO CM Limited in Europe, Asia and Australia and BMO Advisors Private Limited in India. BMO does not provide tax or legal advice. Any discussion of tax matters in these materials (i) is not intended to be used, and cannot be used or relied upon, for the purposes of avoiding any tax penalties and (ii) may have been written in connection with the “promotion or marketing” of the transaction or matter described herein. Accordingly, the recipient should seek advice based on its particular circumstances from an independent tax advisor. This document is issued and distributed in Hong Kong by Bank of Montreal (“BMO”). Bank of Montreal is a registered institution licensed and regulated by the Securities and Futures Commission pursuant to the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong). BMO does not represent that this document may be lawfully distributed, or that any financial products may be lawfully offered or dealt with, in compliance with any regulatory requirements in other jurisdictions, or pursuant to an exemption available thereunder. This document is directed only at entities or persons in jurisdictions or countries where access to and use of the information is not contrary to local laws or regulations. Their contents have not been reviewed by any regulatory authority. This document is provided for general information only and does not take into account any investor’s particular needs, financial status or investment objectives. This document is not to be construed as an

• ffer to sell, a solicitation for or an offer to buy, any products or services referenced herein (including, without limitation, any commodities, securities or other financial

instruments), nor shall such Information be considered as investment advice or as a recommendation to enter into any transaction. Each investor should consider

• btaining independent advice before making any financial decisions.

Disclaimer

DISCLAIMER

All values in this document are in C$ / US$ / A$ / € / £ / ¥ / ₹ unless otherwise specified