Global Rates Weekly
March madness?
• We feel the US bond market is underestimating the downside risks associated
with the impending deadline related to the debt ceiling, automatic spending cuts
and the expiration of the continuing resolution.
• The recent change in liquidity rules is not a game-changer for rates markets,
although a further loosening of bank regulation is a risk to our low-for-long
rate view.
• We remain long duration in the belly of the US curve, but not in core European
markets, given the ECB decision and the strong performance of peripheral debt.
Global
March madness? 2
Political negotiations in the US should be the focus for rates markets over the next
several weeks. We remain long duration in the belly of the US curve. But given the
recent ECB decision and the tightening of peripheral spreads, we remain neutral on core
European markets, despite the recent sell-off.
United States
Treasuries: Maintain long duration 8
We maintain our long duration view, as current yields levels are too high, given modest
growth with downside risk. We also expect the front end to continue to richen versus OIS.
Investors should consider terming out to the 4y sector, as the forward Tsy-OIS basis is too
wide, given expectations of only a marginal spread between the GC and FF rates.
Euro Area
2013 off to a roaring start 23
2013 has started with moves pushing the level of rates higher in swaps and core
markets, and lower in peripheral markets. With some levels now approaching our end-
Q1 13 targets, it is time to take stock and re-assess.
UK
The year of living dangerously? 36
Despite the recent rally, there is a growing perception of negative risks to current gilt
valuations. We express the need for higher risk premium via Gilt 5/30s steepeners.
Japan
Clearing hurdles for the next BoJ easing 56
The BoJ may consider changes in its JGB purchases, including its rinban operations, for
its next monetary easing. One idea is to fuse its JGB purchasing under its rinban and
Asset Purchase Program. However, an optimal solution is likely to prove elusive.