Bank of America Merrill Lynch’s David Woo says he’s more optimistic than the consensus view on the GOP’s ability to pass tax cuts, and on their market impact.
The “ultimate tax reform trade” is a bet on a steeper yield curve, specifically the 2s-10s curve, according to Woo.
Tax reform should increase the deficit and strengthen the dollar, both of which would steepen the spread between 2- and 10-year Treasurys, he forecasts.

If you’re betting that tax reform would be a bigger deal to financial markets than others think, Bank of America Merrill Lynch has a trade for you.

A so-called bear steepener, which bets that long-term interest-rates will rise faster than short-term rates, is “the ultimate tax reform trade,” according to David Woo, a BAML FX, rates, and emerging markets strategist. Specifically, Woo recommends bear steepeners on the spread between 2- and 10-year Treasury yields as one of his top 10 trades in the new year.

“One of the main consensus views going into next year is that tax reform means little and US growth remains in a 2% range, with yield curves and term premium heading into a typical late-cycle story: lower term premiums, flatter curves, lower inflation …read more


Source:: Businessinsider – Finance

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