USD Rates: UST trading closer to fundamentals after a dose of optimism


Modest receive bias
Group Research, Eugene Leow19 May 2023
    Photo credit: Unsplash/Adobe Stock Photo


    US Treasury yields are pushing the top of their respective trading ranges (2Y and 10Y at 4.25% and 3.65% respectively). Since the regional banking sector stresses hit in March, yields have traded depressed versus fundamentals. It was not until the last week when it became clear that banking crisis risks have meaningfully receded for now. A considerable recession premium in UST across all tenors is now being unwound. Firm jobless claims figures, optimism in debt ceiling talks and some hawkish Fed speak have pushed yields meaningfully higher. 

    In the front of the curve, markets are now pricing in a 32% chance of another 25bps hike in June. Aggressive rate cut bets out to end-2024 are also being pared. This was in line with what we had written last week (see here). Rate cut bets might be further faded but we suspect that short-term upside for 2Y yields might be capped at 4.30% (our forecast for 2Q). Meanwhile, 10Y yields are also rising as inflation breakevens ground higher. 10Y breakevens are now at 2.24%, up from barely 2.1% a week ago. Under more benign circumstances, we think 10Y breakevens should be in the 2.3 to 2.4% area, pointing to slightly further upside to 10Y yields. 

    The interplay of rising stocks and rising yields is positive for sentiment. But when overlaid with a stronger USD and understanding that too high yields might lead to another short circuit in the markets, we are wary of extrapolating these dynamics too far. From here on we are leaning in with a modest receive bias. 



    Eugene Leow

    Senior Rates Strategist - G3 & Asia
    eugeneleow@dbs.com
     
     
    Subscribe here to receive our economics & macro strategy materials.
    To unsubscribe, please click here.

    The information herein is published by DBS Bank Ltd and/or DBS Bank (Hong Kong) Limited (each and/or collectively, the “Company”). This report is intended for “Accredited Investors” and “Institutional Investors” (defined under the Financial Advisers Act and Securities and Futures Act of Singapore, and their subsidiary legislation), as well as “Professional Investors” (defined under the Securities and Futures Ordinance of Hong Kong) only. It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. This research is prepared for general circulation.  Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies.  The information herein is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction (including but not limited to citizens or residents of the United States of America) where such distribution, publication, availability or use would be contrary to law or regulation.  The information is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction (including but not limited to the United States of America) where such an offer or solicitation would be contrary to law or regulation.

    This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) which is Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Singapore recipients should contact DBS Bank Ltd at 65-6878-8888 for matters arising from, or in connection with the report.

    DBS Bank Ltd., 12 Marina Boulevard, Marina Bay Financial Centre Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E. 

    DBS Bank Ltd., Hong Kong Branch, a company incorporated in Singapore with limited liability.  18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.

    DBS Bank (Hong Kong) Limited, a company incorporated in Hong Kong with limited liability.  13th Floor One Island East, 18 Westlands Road, Quarry Bay, Hong Kong SAR

    Virtual currencies are highly speculative digital "virtual commodities", and are not currencies. It is not a financial product approved by the Taiwan Financial Supervisory Commission, and the safeguards of the existing investor protection regime does not apply.  The prices of virtual currencies may fluctuate greatly, and the investment risk is high. Before engaging in such transactions, the investor should carefully assess the risks, and seek its own independent advice.