Corporate pension fund rebalancing might be keeping a lid on equities and rates, but not the US dollar. We see the FOMC meeting boosting the US dollar most easily, but we also suggest investors maintain a Treasury market duration underweight. Don't get M.A.D. – get bullish USD, bearish UST.
Interest Rate Strategy We maintain outright short 10y USTs and EDZ2Z4 steepeners, and see a triple inflection supporting higher nominal and real yields. We maintain 10y Germany vs UST and 30y France vs. Germany. We maintain bearish bias for JPY duration via long 20y JGB ASW vs 3m DTIBOR/TONA OIS, 10y JGB ASW vs 3m DTIBOR, and pay 2y1y TONA OIS.
Currency & Foreign Exchange We stay bullish the USD versus EUR, JPY, and CHF via options. We stay long AUD/NZD as we estimate the RBNZ is at serious risk of overtightening into 2022. We remain constructive on GBP crosses and NOK, and bearish on CHF into the local central bank meetings. EUR/SEK has room towards the top end of its sideways range if the Riksbank stays dovish.
Inflation-Linked Bonds In the US, the case for real yield underperformance against nominals has strengthened as carry turns flat, and we maintain short beta-weighted 10y TIPS vs. nominals. We read August CPI as a strong print, with signs of more strength from shelter inflation ahead. In Japan, we expect BEIs to climb gradually towards 30bp. We see little chance of JGBi supply or political developments affecting breakevens.
Short-Duration Strategy We discuss typical trading volume seasonality in the T-bill market with a focus on month-end and year-end periods. We acknowledge this may not be a typical year-end, given debt ceiling dynamics, and we show it hasn't been a typical year for T-bill trading either.
Interest Rate Derivatives We evaluate upper-left vol given the recent belly-led selloff on the back of strong US consumer data. We regress 1y2y vol on market pricing of Fed action and economic surprises, finding current levels about 5 norm vols rich. We consider how upper-left vol performed last tapering cycle.