Weekly US rates review

US yields sold off modestly over the week, with 10y yields rising to 2.23%, as risk assets stabilized amid little economic data. Fedspeak was modestly dovish, with San Francisco Fed President Williams noting that his outlook for a hike later this year was conditional on risks dissipating, which provided some boost to TIPS breakevens even as energy prices fell. 

Next week, all eyes will be on the September FOMC meeting, at which the Fed will also release the updated summary of economic projections, followed by the press conference. It is believed that the Fed is unlikely to hike next week, despite further improvement in the labor market, given the recent tightening in financial conditions and greater uncertainty about the inflation outlook. The Fed is likely to pare back its 2016 forecasts for growth and inflation modestly, particularly given the strengthening of the broad trade-weighted USD since the June meeting. While it is also likely to lower the unemployment rate forecasts, NAIRU estimates should also decline, given subdued wage growth. Were the Fed to hike in this backdrop, it would be seen as a hawkish shift in the reaction function, resulting in a further tightening of financial conditions. Separately, the interest rate projections for 2015 and 2016 should drift lower. 

"We maintain our long Oct FF futures and short 3m5y straddle recommendations. We recommend shorting the 5s10s30s Treasury fly (0.8:2:1.2), as very long-end forwards look attractive relative to medium-term ones", says Barclays