LIVE MARKETS-Deutsche shorts 10-year Treasuries, sees US negative economic supply shock

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DEUTSCHE SHORTS 10-YEAR TREASURIES, SEES U.S. NEGATIVE ECONOMIC SUPPLY SHOCK

Higher tariffs and lower immigration are likely to lead to a negative U.S. economic supply shock, with higher inflation and 10-year Treasury yields as a result, according to analysts at Deutsche Bank, who have gone short the benchmark Treasury notes.

“The U.S. economy is likely to be primarily subject to a negative supply shock (higher tariffs and lower immigration) and a mild negative demand shock (fiscal policy is neutral to slightly loose, but with redistribution effects that should result in lower aggregate demand),” analysts led by Francis Yared said in a recent report.

The result will likely be higher inflation and a weaker economy, without reaching recessionary levels.

“In the absence of fiscal consolidation and a cushion from the term premium, UST10Y should not rally in response to a predominantly negative supply shock.”

Deutsche says that economic data has been consistent with this view, showing that growth should be close to potential despite a weakening labor market, while there are also upside risks to inflation.

Thus, the argument for cutting rates below neutral “is relatively weak from a purely economic perspective. If political pressure leads to more aggressive Fed rate cuts, the curve could twist-steepen, and long-end rates could rise.”

Seasonal trends also suggest higher long-term yields, while an increase in longer-term rates is additionally supported by the expected shift in supply and demand, Deutsche said.

The bank said it is adding a short 10-year Treasury position to its macro portfolio, targeting 4.60%, with a stop at 4.05%. The 10-year note yield US10YT=RR is around 4.31% on Tuesday.

(Karen Brettell)

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