Economic wager: A woman walks past a Citibank branch in New York. Citigroup’s strategists have written that since its trade initiation in May, supply fears have become more muted. — AFP
NEW YORK: Citigroup Inc strategists have exited a trade recommendation betting that longer-term US bonds would underperform as attacks on the Federal Reserve (Fed) intensifies, saying that a near unanimous policy decision last week reduced concerns about central bank independence ”on the margin”.
Strategists, including Dirk Willer and Adam Pickett, advised clients to “take profit” on the bet that 30-year interest-rate forwards will trail five-year tenors after the trade hit a “drawdown limit.”
They initiated the trade at 40 basis points (bps) in May, and added to the position in August at 72 bps, before exiting at 60 bps.
The initial recommendation four months ago was based on expectations that President Donald Trump’s signature tax-and-spending law would swell the government’s debt, putting pressure on longer-maturity debt.
They added to the wager in late August when Trump’s attempt to oust Fed governor Lisa Cook fuelled concerns that the political intervention will jeopardise the central bank’s inflation-fighting credibility.
At last week’s policy meeting, Fed chair Jerome Powell surprised some market participants by forging a near-unanimous consensus behind a decision to resume monetary easing with a quarter-point cut.
Trump-appointed governor Stephen Miran was the only one to vote for a bigger reduction. Fed governors Christopher Waller and Michelle Bowman, both of whom lodged dovish dissents in July, sided with the rest of their peers.
“Since our trade initiation in May, supply fears have become more muted,” Citigroup’s strategists wrote.
The Fed policy meeting this month “has on the margin reduced Fed independence fears,” they said.
In addition, the Fed easing cycles during a soft-landing scenario in the past were “quite shallow, limiting bull steepening potential,” the strategists added. “We therefore step to the sidelines for now.” — Bloomberg
