The ECB’s sustained presence should prevent a significant increase in yields in the euro area, according to analysts at TDS.
“We forecast 10yr bund yields to rise gradually to 0.8% by the end of 2018. Meanwhile, the current state of forward guidance suggests a steeper front-end, which we have expressed via 4y1y vs 1y1y Eonia steepeners.”
“We are biased towards bund flatteners. However, we think that the peripheral curve could steepen as more duration returns into the hands of private investors. We don’t expect political risk to be particularly high next year.”
“With the Bundesbank buying fewer front-end bunds, we expect scarcity premium to be less pronounced. Thus we recommend 5yr bund asset swap tighteners (cash underperforming swaps). In cross market, we favour being long 3y1y US vs EU OIS and short 5y5y UK vs 5y5y EU.”
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