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 Ian Lyngen, CFA Head of Fixed Income Strategy Head of US Rates Strategy Margaret.Kerins@bmo.com Ian.Lyngen@bmo.com 312-931-5038 212-702-1703 0

Current State of Markets Two Main Divergences in Market Massive fiscal and monetary stimulus have pushed investors out the risk curve. 1. 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. There is real economic destruction and longer-term impacts due to the 2. shutdowns and social distancing. The damage is unknown, but a day of reckoning is on the horizon. Source: BMO CM 1

Market Levels & Issuance Trends UST (Yld) US Agy (Bp) Global SSA (Bp) 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 Net Issuance - GSE & Washington Based SSAs Equity Market & Investment Grade Corporates 200 150 3,600 50 3,400 100 100 3,200 150 $Bn 50 3,000 200 Index bp 2,800 0 250 2,600 300 2,400 -50 350 2,200 -100 2,000 400 DNs Bullets Callables FRNs Ex SOFR FRNs 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 SOFR GSEs & IBRD, IFC, IADB S&P 500 Index (LHS) IG Corporate Spreads (RHS, Inverted) YTD 5/31/20 Source: BMO CM, GSEs, SSA, Bloomberg 2

Fiscal and Monetary Stimulus Summary  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 11 th (6/17/20). 7,000 3,000 6,000 2,500 1,919 5,000 2,000 4,000 $Bn $Bn 1,500 3,000 1,000 4,169 2,000 547 500 1,000 1,546 0 0 6/17/20 Holdings Chg since 3/11/20 Total New Facilities UST Agy MBS 6/17/20 Holdings Potential Maximum Size Source: BMO CM, NY Fed 3

Fed Purchases in the Context of the Market  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. 400 2,500 2,500 300 2,000 2,000 200 1,500 1,500 100 1,000 1,000 $Bn $Bn $Bn 500 500 0 0 0 -100 -500 -500 -200 -1,000 -1,000 -300 -1,500 -1,500 -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 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 Cumulative Net Bill Issuance after Fed Net Net Bill Issuance Net Net Coupon Issuance After Fed Cumulative Net Cpn Issuance after Fed Source: BMO CM, US Treasury, NY Fed 4

Fed’s Dimming Economic Outlook FOMC 2020 2021 2022 Long-Run GDP -6.50 5.00 3.50 1.80 2.00 1.90 1.80 1.90 Dec Est. Core-PCE 1.00 1.50 1.70 1.90 2.00 2.00 Dec Est. UNR 9.30 6.50 5.50 4.10 3.50 3.60 3.70 4.10 Dec Est. Fed Funds 0.10 0.10 0.10 2.50 1.60 1.90 2.10 2.50 Dec Est. Source: FOMC, BMO C 5

Trading the 10-year Yield Range in 2020 6

Rolling Fed Expectations Confirm Lower for Longer 7

Financial Conditions Much Easier 8

Volatility Drives Financial Conditions 9

Election Event Risk 10

Biden’s Election Odds Improving 11

New Growth Normal? 12

Global Business Sentiment Bottoming? 13

Surprise Indices for US and World Economies 14

Real Wage Gains Misleading 15

Corporate Receipts Drop on Tax Reforms and Recession 16

Year-over-Year Core Peaked in 2018 17

Shelter a Key Positive Contributor to Inflation 18

Autos: Driving Modest CPI Volatility 19

Apparel: Transitory or Just Volatile? 20

Domestic Buyers Stepping Up in Treasuries 21

Hedge Adjusted 10-year Yields Bottomed? 22

Japanese Investors Mixed in Treasuries 23

China Continues Selling Treasuries 24

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