COULD US RATES COME IN FOR ANOTHER SELLOFF?

Since the beginning of the year, long term $ rates have been undergoing an almost uninterrupted sell off, with February paying tribute to the great est hours of the taper tantrum: nominal rates rose by around 45bp, while real rates rebounded by around 30 basis points. While the month of March brought a welcome respite, we wondered about the mechanisms of the February sell off and risk areas for the coming months. Indeed, if the s park igniting the sell off was mainly macroeconomic fundamentals (end of the pandemic in sight , fiscal stimulus, rise in inflation expectations), more technical factors accelerated the sell off. We looked for clues to corroborate whether convexity hedges and bond issuance played a role , and search for clues of a possible gamma trap and the deployment of taper tantrum trades. We consider that the sell-off is partly attributable to self sustaining factors like reallocation, hedging and regulatory constraints , all of which are unlikely to pop again by the end of the year. On the other hand, the positioning on the taper tantrum theme and the uncertainties on medium-term inflation in the AIT framework could prompt other bearish episodes . Nevertheless, since these themes impact real rates and indirectly financial conditions, the Fed will be less benevole in managing these steepening phases. We maintain our year-end target of 1.7% for the 10-year rate, since although the reflationary trend should continue, three natural stabilizers (the Fed, pension funds and foreign investors) should benefit from attractive entry points during the next corrections to come.