US rates: Weekly review

At the October FOMC meeting, even as the Fed acknowledges the weakness in realized data over the past month, it is likely to balance this with an acknowledgement of the decline in risks from financial developments. At this stage, the Fed would prefer to have the probabilities of a December hike close to even, compared with the 30-40% currently priced. 

"We maintain our pay 5s and 10s30s curve-flattener view and recommend buying a 6m*3y 1x2 ATM/ATM+15 payer spreads", says Barclays.

US Treasuries were largely rangebound over the past week amid little economic data of note and with the ECB hinting strongly at further easing measures by December. On the political front, there seems to have been some progress regarding electing a Speaker of the House, with a broad majority of Republicans indicating their support for Rep. Paul Ryan. Despite this positive development, the Treasury was forced to postpone the 2y auction, scheduled for next week. The Treasury noted that "due to debt ceiling constraints, there is a risk that Treasury would not be able to settle the 2-year note on Monday, November 2, 2015"1 . The other auctions (2y FRN, 5s, and 7s) are still scheduled to settle on November 2. 

Activity data were slightly better than expected with housing surprising to the upside (existing home sales, housing starts, and NAHB all printing better than expected). Labor market data also showed further improvement, with initial and continuing claims inching lower. The economists are now forecasting 1.5% real GDP growth in Q3, but final domestic sales is tracking roughly 3.6%. 

Global news was better, with China's GDP coming in stronger than expected and the ECB's survey showing a continued improvement in lending conditions. At its latest meeting, the ECB noted that the degree of monetary policy accommodation will be reexamined in December. 

"Our economists expect the ECB to announce a program extension beyond September 2016 by six to nine months. A cut in the deposit rate is not our baseline for December, but remains an option, and could be deployed next year", added Barclays.