Citi shorts Treasuries but adds on bet against yuan

Bloomberg

Citigroup Global Markets says Treasury yields are set to rise, and there’s a way to screen out one of the main risk factors that may push them lower by betting against the yuan.
The US brokerage recommends its clients position for higher US rates and also use options to wager against any strength in China’s currency. The rationale is that a slowdown in Chinese economic growth that would drag down Treasury yields, will also cause the dollar to appreciate versus the yuan.
“While the near-term picture is murky, our conviction on the broader macro picture is supportive of higher” US 10-year yields, Citigroup strategist Jabaz Mathai in New York wrote in a client note. “Given that China weakness is a macro risk for rates, we reduce the premium by selling short-dated out-of-the-money puts on USD/CNH.”
Mathai says the outlook for Treasuries over the next couple of weeks is hard to call, but over the longer term a rebound in economic growth and Federal Reserve tapering will see benchmark 10-year yields climb to 2% by the end of 2021.
Citigroup recommends initiating a short position in Treasuries through buying a structure known as payer spreads on 10-year swap rates, with a six-month expiry, aiming for rates to rise by 25 to 50 basis points. Investors should simultaneously sell three-month puts on USD/CNH struck at 6.40.
Treasury 10-year yields were at 1.27% on Monday and the offshore yuan was at 6.4958 per dollar.