KTB Market to Remain Range Bound
The author is an analyst of NH Investment & Securities. He can be reached at sw.kang@nhqv.com. -- Ed.
In 1Q21, the US Treasury is to issue US$1.13tn worth of TBs. Recently, however, mutual funds (whose TB buying exceeded that of the Fed in 2Q20) have been experiencing fund outflow. In addition, the Fed appears unlikely to preemptively expand QE. Against this backdrop, supply-demand imbalance should be highlighted in 1Q21, arising from expectations for economic improvement.
1Q21 US TB issuance to outsize demand
In 1Q21, the US Treasury plans to issue US$1.13tn worth of TBs. We note that the 2Q20 issuance of TBs worth US$2.75tn proceeded smoothly thanks primarily to demand from mutual funds (US$1.19tn increase in TB holdings) rather than the Fed (US$1.15tn). Recently, however, funds have been flowing out of government MMFs. And, given that inflation momentum is to be highlighted in 1Q21, the Fed is unlikely to increase the scale of QE. In fact, the November FOMC minutes even signaled a lack of QE expansion in the short run. Therefore, expectations for economic rebound are likely to be coupled with supply-demand mismatch in 1Q21. Against this backdrop, upward pressure on US TB yields should continue to prevail.
Bare-bones UK-EU FTA likely before end of transition period
Before the end of the transition period (Dec 31), the UK is expected to reach an FTA agreement with the EU. Given the upcoming 2024 general elections and recent sharp narrowing in approval ratings between the Conservative and Labour parties, we believe that the Conservatives have little to gain—in either political or economic terms—from a no-deal Brexit.
KTB market to remain range bound, in line with global yields
The BOK has hiked its GDP growth forecasts for 2020 and 2021, anticipating large-scale fiscal spending mainly to be executed within 1Q21. Despite a weighting reduction for ultra-long-term issuances, supply-demand imbalance is expected to persist, given the chances of additional supplementary budgets. Taking the above into consideration and seeing no need to rush into dip-buying of long-term KTBs, we continue to recommend the adoption of a defensive position incorporating short-term bonds.