Citigroup Says to Boost Bets Against Long Bonds on Risks to Fed

Citigroup strategists recommend investors increase bearish bets on long-term US bonds, anticipating a steepening yield curve where 30-year interest-rate forwards underperform five-year tenors. Concurrently, they advise buying the euro against the dollar via derivatives, citing the risk that President Trump's actions could undermine the Federal Reserve’s political independence, potentially leading to dollar depreciation.

Analysis

Citigroup Inc. strategists are recommending clients increase bearish positions on long-term US government bonds, citing political risk to the Federal Reserve's independence. The specific trade advised is to add a small position to wagers that 30-year interest-rate forwards will underperform five-year tenors, a strategy that profits from a steepening yield curve as the spread between long and short-term rates widens. This view implies that investors will demand a higher risk premium for holding longer-dated US debt due to potential political interference with monetary policy. Concurrently, strategists Adam Pickett and Dirk Willer recommend buying the euro against the US dollar via derivatives, anticipating that actions from President Trump could undermine the central bank's credibility and lead to a depreciation of the dollar. The overall market sentiment is moderately negative and cautious, focused on the interplay between US domestic politics, monetary policy, and its subsequent impact on sovereign debt and foreign exchange markets.

Key Decisions for Investors

• Investors should consider positioning for a steeper US yield curve by evaluating trades that short 30-year bond forwards relative to 5-year tenors.
• Given the anticipated risk to the US dollar, it may be prudent to hedge dollar-denominated holdings or establish long positions in other major currencies, such as the euro, potentially using derivatives.
• Closely monitor political rhetoric and actions concerning the Federal Reserve's independence, as such developments are now a primary catalyst for potential volatility in US bond and currency markets.