US Fixed Income Markets Weekly;De-risking by investors and regulatory uncertainty are combining $TLT

Overview. De-risking by investors and regulatory uncertainty are combining to create deteriorating liquidity in fixed income markets; look for the flight to liquidity to persist,liquidity differentials to widen, and less liquid asset classes to cheapen in the near term. The US experience in 2008 provides a guide to quantifying the impact of liquidity on various asset classes; we review our stylized model for risky asset spreads from 2008 and discuss recent spread moves in that context; the magnitude of recent spread widening suggests that despite robust economic data thus far, risky asset markets are priced to a deteriorating forward-looking outlook; this suggests that as financial markets stabilize in the medium term, spreads could compress assuming downside tail economic scenarios are averted. With volatility high and flight-to-liquidity pressures expected to persist, we stay neutral on most asset classes. Growing downside risks to growth and persistent low inflation are likely increasing the risk of a later-than-baseline onset to Fed tightening; we revise our near-term Treasury yield targets lower and turn neutral on intermediate Treasuries. Stay underweight front-end Treasuries.