We remain tactically LONG on USTs for the following reasons:
1) We continue to believe that the US economy is not overheating.
2) We remain of the view that market’s pricing of Fed policy is overly hawkish.
3) Carry considerations remain supportive. USTs continue to trade close to post
Liberation Day levels, remaining near the Trump administration’s pain threshold.
That said, we continue to take a cautious approach towards USTs this month in terms of further accumulation, as upside risks to yields have increased over the past few weeks. Our caution is based on the following consideration:
1) The recent sell-off appears to have been macro-driven. While last month's UST sell-off was largely driven by market frustration over the longer-than-expected duration of the Middle East conflict, the recent rise in Treasury yields has been supported by stronger-than-expected economic data and markets assigning a higher probability to the economy overheating.
2) Markets may begin pricing in higher inflation expectations. Given the continued strength of the economy, we see a risk that inflation expectations are repriced upwards over the coming weeks.
3) The term premium remains relatively low and below its pre-conflict average. We believe the risks remain tilted towards a further increase in the term premium in the near term, especially taking into account the fact that under the new Chair, the Fed’s reaction function has become increasingly difficult to read and in light of the extensive reform of the Fed that Chair Warsh is willing to bring.
5) Positioning has become more balanced.
4) The balance of risks surrounding the fiscal deficit has shifted to the upside due to substantial refunds of tariffs collected under IEEPA.
Against this backdrop, we are not increasing our exposure further at current levels, and we maintain our threshold for further accumulation at 4.80%. Meanwhile, we raise the threshold for moving to a NEUTRAL stance to 4.20% from 3.95%. Strategically, we maintain our NEUTRAL stance. Solid economic growth and a more gradual convergence of inflation towards target suggests yields are likely to remain around
current levels, or only modestly lower, over the medium term. The main risk to both our tactical and strategic views remains that the US economy proves more resilient than expected.
Chiara Cremonesi
Senior Rates Strategist
Investment Research
Marketing material for professional clients or qualified investors only.
This material does not constitute an advice, an offer to sell, a solicitation of an offer to buy, or a recommendation to buy, sell, or hold any investment or security or to engage in any investment strategy or transaction. ANIMA can in no way be held responsible for any decision or investment made based on information contained in this document. The data and information contained in this document are deemed reliable, but ANIMA assumes no liability for their accuracy and completeness.
ANIMA accepts no liability whatsoever, whether direct or indirect, that may arise from the use of information contained in this material in violation of this disclaimer and the relevant provisions of the Supervisory Authorities.
This is a marketing communication. Please refer to the Prospectus, the KID, the Application Form and the Governing Rules (“Regolamento di Gestione”) before making any final investment decisions. These documents, which also describe the investor rights, can be obtained at any time free of charge on ANIMA website (www.animasgr.it). Hard copies of these documents can also be obtained from ANIMA upon request. The KIDs are available in the local official language of the country of distribution. The Prospectus is available in Italian/English. Past performances are not an indicator of future returns. The distribution of the product is subject to the assessment of suitability or adequacy required by current regulations. ANIMA reserves the right to amend the provided information at any time. The value of the investment and the resulting return may increase or decrease and, upon redemption, the investor may receive an amount lower than the one originally invested.
In case of collective investment undertakings distributed cross-border, ANIMA is entitled to terminate the provisions set for their marketing pursuant to Article 93 Bis of Directive 2009/65/EC.