Steeper Curves in Major Government Bond Markets in 2013
We forecast a gradual increase in intermediate maturity yields in the main
currency areas, as investors bring forward to 2015/16 expectations around
the start of the tightening cycle, and build a bigger term premium for the
period spanning 2017-2022. In the US, we project 10-year Treasury yields
to end 2013 at 2.25% – around 40bp above the forwards – and from there
continue to rise, reaching 3.75% by end-2016.
EMU Yields Set to Converge Further
We expect to see a further reduction in the yield offered by Spain and Italy,
particularly in maturities up to 5 years. This should support the
deleveraging of bank balance sheets in these two economies and, over
time, result in a more even distribution of liquidity in the Euro area. As one
of our 2013 Top Trades, we recommend positioning outright long of 5-year
Spanish Government Bonds with a target of 3.50%, translating into an unlevered
total return in the region of 8%.
EMU Sovereign Debt: A Prospective Metamorphosis?
While we do not expect credit events, we foresee heightened awareness of
potential shifts in seniority ranking for EMU legacy sovereign debt, after
the introduction of CACs, heavier issuance from the EFSF/ESM, and a
debate around possible debt mutualisation and common issuance. Such
topics are likely to become more prominent in the run-up to the German
elections next September and affect primarily very long-dated maturities.