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Bund Yields Rise 

Last week we saw the BundMarch 16 futures progressively roll to the June 16 contract and with that camea wave of selling which led to a rise in the yields. The level of interest forsellers came at the 10bp mark. With the ECB meeting coming up, it's importantto note that there has been some strong longs positioning with about 40bp dropsince the last ECB meeting. If we get a strong signal of increased QE purchasesthat could induce more buying as there will be strong supply demand issues todrive yields lower. If however we see an increase in QE but only in corporatebonds, there could be a good chance Bunds sell off aggressively as this willcount as credit easing and equity markets will likely rally leading to risk onflows.
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5y5y InflationSwaps Rebounding Aggressively into the ECB 

Coming into the allimportant ECB meeting this week, the 5y5y inflation swap forwards have beenrallying aggressively, most probably due to investors and traders believing theECB will act to spark some inflation and also on the back of a strong commoditycomplex recently. Since the last ECB meeting, the swap rate has come off from1.57% down to the low at 1.36% and the bounce recently has us just above 1.5%.This rate is hugely important for the ECB as it measures the medium terminflation expectations of the market and thus shows us that if they do not actbig and shift their language to an even more dovish tone, the market may beginto price in potential deflationary scenarios.
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