FI Research – Pressure-off on easing pedal (Part 1)

v As markets contemplate an eventual rate liftoff along with rebound in oil prices, great rotation of bond to equity and expectation of ECB’s quantitative easing (QE) tapering off, we argue that volatility in interest rate will likely to persist.

v We take a quantum leap of faith of US economy with breadth of evidences that middle-income consumers have finally decided to open up their wallets, supported by improving labour markets condition, aggressive easing in China and surging global equities. All these drivers are a recipe for higher inflation breakeven and resurrection of talk of earlier US rate hikes.

v The risk party is well and alive. US yield curve turns flattish on rising net position of US 2-year Treasury future notes since mid-2014 as traders, money managers, and leveraged funds turned bullish in betting drop in prices. At the same time, markets rebooted their overall bearish position on 10-year Treasury future notes. One could expect complacency is kicking in at least in the intermediate and longer end of US Treasury curve.