October FOMC meeting to be a game changer?

Next week's FOMC meeting will be a game changer for front-end rates. Instead, the debt ceiling showdown in DC and the global risk sentiment after a dovish ECB and PBoC will likely take center stage. 

"While it is far from being bond bears, the risks of a modest tactical sell-off in rates have increased. The front-end is now fully priced for only two hikes through 2015-16, and even more notable, open interest on par calls in Eurodollars-a trade that pays off if LIBOR rates are negative one year from now-has jumped nearly 300k contracts", says Bank of America. 

In addition, aggregate asset manager front-end positions are now the least short they have been since September 2014. The last time asset managers bought the front-end at such a furious pace was Sep-Nov 2013-soon after a dovish September FOMC meeting and in the midst of a debt-ceiling crisis and government shutdown. 

In the following four weeks, 5y yields sold off about 40bp. These positioning risks tilt us toward a tactical bearish duration stance and leave us comfortable in the near term being slightly higher than consensus forecasts for the first time all year.