Silver Spikes to $62.89 on Fed Cut – But Weekly Bearish Divergence Flashes Caution: Don’t Chase, Wait for the Dip 
Japan’s Finance Minister Signals Alignment With BOJ as Rate Hike Speculation Grows 
BOJ Expected to Deliver December Rate Hike as Economists See Borrowing Costs Rising Through 2025 
Brazil Holds Selic Rate at 15% as Inflation Expectations Stay Elevated 
Canada Stocks Steady as Markets Await Fed and BoC Decisions 
Fed Rate Cut Signals Balance Between Inflation and Jobs, Says Mary Daly 
South Korea Warns Weak Won Could Push Inflation Higher in 2025 
ECB Signals Steady Rates Ahead as Policymakers Warn of Inflation Risks 
Though Treasury Secretary Steven Mnuchin said this week that he is seriously considering 50-or 100-year debt, we continue to think the scope for adding either maturity point is limited. While internationally, the outcome of the French presidential election remains a very large tail risk.
Last week yields initially rose on the back of Yellen’s semi-annual testimony before Congress, as well as a higher-than-expected CPI report, which led us to pull forward our projections for this year’s rate hikes to May and September versus June and December.
Buy 5-year real yields: With inflation risk rising, the more structural drivers of low real productivity growth still very much in place, and attractive near-term carry, we recommend buying 5-year real rates.
Receive in $300mm notional of a 1Mx5Y forward starting swap (start date 3/28/17, maturity 3/28/22, coupon 2.028%) versus paying fixed in $293.9mm of a 1Mx5Y inflation (US CPI) swap (start date 3/28/17, maturity 3/28/22, zero coupon) at a current spread of -18.1 bp.
Stay positioned for an underperformance of USD swaps in a sell-off by selling 3Mx5Y AUD versus USD payer swaptions.
Stay long $100mn notional 3Mx5Y ATMF USD payer swaption (notification date 5/10/17, maturity date 5/12/22, strike 2.048%, premium 75.8bp) versus selling A$152mn notional of 3Mx5Y ATMF AUD payer swaption (notification date 5/10/17, maturity date 5/11/22, strike 2.595%, premium 60.4bp).
This trade is constructed to be premium neutral at inception and has a forward risk weight of 85%. P/L since inception 5.7 bp.
