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BNP PARIBAS MARKETS CALL - Summary

Core Content

The BNP Paribas Markets Call provides a weekly cross-asset market view, focusing on the global rise in interest rates and its implications across various asset classes. The document highlights the strong US economy, rising inflation, and the impact of central bank policies on financial conditions and bond yields. It also outlines market trades and investment opportunities, with a particular emphasis on the 10s30s UST flattener.

Key Points

Global Economic Outlook

• The US economy is outperforming the rest of the world, supported by strong activity data, tax cuts, and repatriation.
• Inflation is rising globally, with the US and UK CPI now above the 2% level.
• G4 gross supply net of QE is expected to increase in the coming months, which will put pressure on global bond yields.

Financial Conditions

• Financial conditions have become less restrictive due to lower volatility, tightening credit spreads, and reduced funding costs.
• The US yield curve is flattening, with 10y UST futures positioning at an extreme short, indicating a potential for curve flattening.
• The ECB's QE has created a "QE premium" which is expected to reduce by around 50bp, leading to higher rates in Europe.

Market Impacts

• Emerging Markets (EM) are under pressure due to higher US rates and strong USD.
• Japanese investors are finding US bonds less attractive due to high FX hedging costs and low carry.
• UK economic strength is being affected by Brexit uncertainty, with the economy still in a weak position.

Investment Opportunities

• 10s30s UST flattener is recommended as a trade, with an entry at 20bp, current at 15bp, and target at -20bp.
• The potential demand for duration hedging from US pension funds is significant, with a duration gap of USD 1.8bn.

Key Contributors

• Robert McAdie – Global Markets Head of Strategy Research, BNP Paribas London Branch
• Pierre Mathieu – Senior Cross Asset Strategist
• Benedicte Lowe – Cross Asset Strategist
• Kris Gjini – Cross Asset Strategist
• Michael Sneyd – Head of Macro Quantitative & Derivatives Strategy
• Laurence Mutkin – Global Head of G10 Rates Strategy
• Shahid Ladha – Head of Strategy for G10 Rates Americas
• Marco Meijer – Senior Interest Rate Strategist
• Parisha Saimbi – Inflation and UK Rates Strategist

Key Tables and Data

US and European Rates Outlook

Key Charts and Visuals

• Chart 1: US strength indicator remains firm despite modest negative surprises.
• Chart 2: ECB buying has created a "QE premium" and is expected to reduce by about 50bp.
• Chart 3: US CPI is expected to rise further, supporting higher inflation.
• Chart 4: The US yield curve is flattening, while the UK and Japan curves are showing neutral or flattening trends.

Market Outlook and Trade Recommendations

• Trade of the week: 10s30s UST flattener.
• Current spread: 15bp.
• Entry point: 20bp.
• Target: -20bp.
• Stop-loss: 28bp.
• Carry: -0.5bp per month.

Additional Information

• Dial-in details for the webcast are provided for various countries, with the password being "The BNP Paribas Markets Call".
• Legal Notice: This document is non-independent research and may be subject to conflicts of interest. It is intended for the purpose of marketing communication under MiFID II regulations.

Summary

This report from BNP Paribas Markets Call outlines the current global rise in interest rates, emphasizing the strong US economy and rising inflation. It discusses the flattening of the US yield curve, the impact of ECB QE, and the effect of FX hedging costs on investor behavior. The 10s30s UST flattener is recommended as a trade, with a bearish outlook on US and European rates. The UK and Japan are highlighted as underperforming relative to the US, with Brexit uncertainty and currency weakness affecting their markets. The report also notes the significant potential demand from US pension funds for duration hedging, which could influence the bond market.