The US downgrade has been a trigger for a sharp rise in risk aversion, pushing yields to record lows.
The relief in markets following the FOMC statement that rates were to be kept exceptionally low until at least mid-2013 failed to last.
Concerns over a deep economic slowdown have intensified – the global economy is poised to grow below trend in 2012, due to structural factors and fiscal tightening.
The EMU sovereign debt crisis continues to weigh on confidence. However, tensions on peripherals have eased as the ECB has started to buy Italian and Spanish bonds.
Additional measures to move out of the liquidity and debt trap will be needed. In the short run, attention will be on signs of stress in funding markets and equities.
Until we see a stabilisation in equities – which look attractive at current levels – the bid for safety will continue to support govvies.
We recommend favouring the belly of the Treasury curve and steepeners on the Euro curve while expecting intra-EMU spreads to come in further.
The chances of more QE by the BoE have increased, in our view.
The 10y JGB looks cheap on the curve, with a possible break of the 1% barrier ahead.
FX markets remain fixated on the Swiss franc and are expecting further action from the authorities.
USDJPY is at risk of a major break through the previous BoJ-intervention level.
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BNP Paribas
Corporate & Investment Banking