UST outlook justifies looking for extension trades

The recent US moves justify looking for select opportunities to extend duration, taking advantage of steep spread curves. Although a Fed hike in September still seems a realistic scenario, the effect of such a move on long-end rates should be contained. 

In fact, recent developments in China, with the CNY devaluation and potential for greater market alignment, lower US yields, as the case for the hiking cycle is expected to be gradual and term premia to be lower. 

"At year-end 2015, US long-end rates are expected to be marginally higher than current levels (by c.20bp), but further 10y/30y UST curve is not expected to be flattening. However, it is still adequate to be positioned defensively in EM credit, as the adverse macro and flow environment and relative valuations of EM versus DM credit continue to argue for further pressure on EM spreads over the next few weeks", says Barclays. 

Hence, focussing on credits is recommended with solid fundamentals for potential extension/curveflattener trades.