2. Learning from Japanese fiscal stimulus Ultimately, fiscal stimulus is not the long-term answer to flat curves or low neutral rates (Japan being the prime example). Fiscal stimulus merely captures some low-hanging fruit that extends the business cycle by a couple of years and provides the central bank an opportunity to get further away from the ZLB. Said simply, fiscal stimulus raises the terminal rate in the current business cycle while doing little for the long-run neutral rate — this by definition should be more bearish for intermediate rates than 30y rates. 3. Additional deficit issuance With the average maturity of UST debt already standing at record highs (7Omonths), Treasury showing an inclination to cut long-end issue sizes in 2016, and the supply shortfall in the front end of the UST curve post MMF reform, we also believe that the US Treasury will finance the increased deficit using the belly of the UST curve as opposed to the long end Trade: We recommend a 3m5y OTM payer 25 delta, strike = 2.05% for a gross payoff ratio of 3.4: 1. See the Best Vol Trades section for more details and risks. But focus on being short real rates now After spending much of 2016 successfully being long real rates, we recommend switching to a real rate short for 2017. We think the consensus was too slow to get on the real rate train and is now too long relative to benchmark. As described in the detail here, fiscal stimulus is likely to leave government and private companies competing for a shrinking pool of savings, driving the real cost of debt higher. We highlight three reasons why short real rates provides better risk-reward now (Chart 15). - Anti-globalization = higher real rates: Few appreciate that one of the biggest beneficiaries of globalization has been US real rates. Globalization was undoubtedly good for EM growth and reserves. As these reserves found their way back into the US, US real interest rates were held lower. As the global savings glut unwinds, real rates ha