US Treasuries have surprisingly strengthened on the back of US political uncertainties and doubts in Fed rate hike path, with yields approaching their lowest ranges since Nov 2016. In the near term, risk events will be the UK election outcome and ECB meeting (8 Jun), before heading into Jun FOMC (15 Jun).

Attached is the monthly market commentary for May 2017. We have included the near term outlook for the month of Jun 2017.

• US Treasuries have surprisingly strengthened on the back of US political uncertainties and doubts in Fed rate hike path, with yields approaching their lowest ranges since Nov 2016. In the near term, risk events will be the UK election outcome and ECB meeting (8 Jun), before heading into Jun FOMC (15 Jun).
• The market continued to play down Trump’s administration in recent weeks, with focus back on the Fed. Market was largely anticipating the Fed to raise rates at the Jun FOMC meeting, but focus will also turn towards how fast the Fed will embark on future rate hikes as well as how much and how fast it will alter its balance sheet off its holding of UST securities.
• In our opinion, if policymakers hold their previous stance, with year-end median Fed funds rate at 1.40%, as indicated by the Dot plot released on 15 Mar, yields should be heading upward mildly to approach a short term target 2.30%. Any upward momentum in yields will be pared, we think, as higher interest rates will then play into risk-to-growth worries (especially after recent weak US economic data).
• However, the Fed not raising rates at the upcoming meeting also plays into concerns on US economic growth outlook, and we think that market will be reassessing the central bank’s normalization path, and probably seeing both the USD and UST yields to be further pressured (10T to retest 2.00%).