US Rates Strategy US Rates Outlook: The Calm before the Storm Ian Lyngen, CFA Head of US Rates Strategy Ian.Lyngen@bmo.com 212-702-1703 0
Our Call: Structurally Lower for Longer Q1 '20 Q2 '20 Q3 '20 Q4 '20 2s 1.60 1.55 1.10 1.05 2s/10s 0.40 0.40 0.20 0.45 5s 1.80 1.70 1.20 1.20 10s 2.00 1.95 1.30 1.50 30s 2.35 2.30 1.60 1.75 5s/30s 0.55 0.60 0.40 0.55 2s/10s/30s 0.05 0.05 -0.10 0.20 2s/5s/10s 0.00 -0.10 0.00 -0.15 Source: BMO CM 1
Fed’s Dimming Economic Outlook FOMC 2019 2020 2021 2022 Long-Run GDP 2.20 2.00 1.90 1.80 1.90 2.20 2.00 1.90 1.80 1.90 Sept Est. Core-PCE 1.60 1.90 2.00 2.00 1.80 1.90 2.00 2.00 Sept Est. UNR 3.60 3.50 3.60 3.70 4.10 3.70 3.70 3.80 3.90 4.20 Sept Est. Fed Funds 1.60 1.60 1.90 2.10 2.50 1.90 1.90 2.10 2.40 2.50 Sept Est. Source: FOMC, BMO CM 2
Trading the 10-year Yield Range in 2020 3
Seasonals are a Key Factor in Our Near-term Bias 4
Rolling Fed Expectations Will Imply Deeper Cuts 5
1990s: A Dated Guide to ‘On Hold’ 6
Financial Conditions Much Easier in 2020 7
Volatility Drives Financial Conditions 8
Fed’s Curve Preference 9
Fed’s Recession Odds Still ‘High’ 10
Recessions are Not Always Obvious at the Time 11
Negative Yields Persist Overseas 12
Under-Confidence Risk 13
CEO Confidence Dropped 14
Falling Confidence Lowers Spending 15
Election Event Risk 16
Trump’s Reelection Odds Improving 17
Sanders Leads for Democratic Nomination 18
Above Average Growth Sustainable? 19
Trade Remains a Wildcard due to Tariffs 20
Is the CapEx Boom Over? 21
Inventory Drag – Big Bet on Consumption 22
Inventories Building Faster than New Orders 23
Housing Finally Adds to Domestic Growth 24
Non-Mortgage Interest Payments Spike Ahead of Recessions 25
Importance of Student Debt and Auto Loans 26
Auto Loan Delinquencies Near Crisis Peak of 5.27% 27
<35 Year-old Homeownership Hit Hardest 28
Real Wage Gains Sliding 29
Home Buying Conditions more than just Mortgage Rates 30
Year-over-Year Core Peaked in 2018 31
Core Inflation Underperforms Fed’s Expectations 32
Shelter a Key Positive Contributor to Inflation 33
Japanese Investors Back in Treasuries 34
Hedge Adjusted 10-year Yields Bottomed? 35
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