Securitized Products

Highlights Duration: In the absence of a major economic shock we will reinitiate a below-benchmark duration recommendation once the Global Economic Policy Uncertainty Index displays some mean reversion and positioning indicators are at less bearish extremes. Fed Balance Sheet: The Fed could…

Highlights Chart 1Upside Risks & Uncertainty Upside Risks & Uncertainty…

Highlights Chart 1More Upside From Inflation bca.usbs_pas_2016_12_06_c1…

Highlights Duration: We continue to advocate a below benchmark duration stance, but the bond bear market is likely to take a pause once market rate expectations have fully converged with the Fed's forecasts. TIPS: The Fed will be reluctant to offset any inflationary fiscal impulse until TIPS…

Highlights Chart 1Targeting 2% bca.usbs_pas_2016_11_08_c1…

There are two key risks that could derail a bear-flattening of the yield curve. The first is a Trump election victory, the second is a flaring of stress in the non-U.S. banking sector.

In this week's report, we lay out all of the arguments in favor of and against lifting rates before the end of the year. Specifically, we identify seven key questions about the economic outlook that will undoubtedly be the focus of this week's FOMC deliberations.

The Treasury curve will bear-flatten between now and a likely December rate hike. Beyond December, our strategy will depend on how the dollar responds to increased rate hike expectations. For now, maintain below benchmark duration and favor convexity risk over credit risk.

With recent comments strongly hinting that the Fed is on track for a rate hike in December, the dy-namics of the Fed Policy Loop make spread product appear extremely vulnerable.

Eventually the easing of financial conditions will strengthen the Fed's resolve to lift rates. Rate hike probabilities will rise and risk assets will struggle to cope with higher Treasury yields.