Trade Recommendation USD Rates: Data Weak For Some Time

Buy the Dec 14/15/16 Euro$ (short belly) at -42bp (BGG: BEDZ4Z6 Comdty)

Scale in: ½ position at-42bp and the possibility of another ½ position at -54bp

Levels: Target at -20bp, Stop at-62bp, roll: Initial 3M -3.5bp, next 3M is +3bp

The sweet spot on the money market curve
In recent weeks, expectations of Fed tapering have been pushed to spring 201,4 and the money market curve has flattened with the first Fed Funds hike now being priced for late Q3 15.

Rates have generally declined in recent weeks with 10-year treasuries yielding 2.53%. Even though we are at the low end of our expected range for the rest of 2013 (2.40-2.80%) we are neutral on the outright levels as US data could still look weak for some time to come. Furthermore, visibility will remain low towards the end of the year due to data distortions from the shutdown.

Hence, we like trades that can perform with little conviction on the next move in the outright levels.

This trade benefits in several possible scenarios:
If rates decline further we would expect the money market curve to flatten further and expectations of tapering (and ultimately the timing of the first hike) to be postponed further. This is likely to cause further flattening of the Dec15/Dec16 slope. Meanwhile, Dec14/Dec15 is unlikely to flatten much as it already flattened more than 50bp.

If rates in general move up there is limited steepening potential of Dec15/Dec16, as it is already relatively steep in a historical context, meanwhile Dec14/Dec15 should have the potential to steepen significantly.

Hence, we like to take a position on the place on the money market curve where the next change in expectations is most likely to happen – the sweet spot.

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