The Treasury rally has lost momentum, with yields failing to break decisively below this year’s lows. The near-term strategy call on yields and the curve is neutral.
For a lasting reversal of the spring rally, a run of strong data and/or signals from the Fed in favour of an earlier start to policy normalisation will be required. The minutes to the April FOMC meeting suggested that the latter remains unlikely.
Intra-EMU spreads are widening amid discussion of a ‘soft restructuring’ of Greek debt. Uncertainty over this should prevent any major setbacks for core EGBs. The 3.08-3.10% area for the 10-year benchmark yield appears to be a solid floor.
There is scope for limited OIS/BOR spread compression. A continuation of the rebound in equity markets would open the door to further curve flattening.
The ECB remains vehemently against a restructuring of any type, fearing the spill-over effects. A ‘hard’ restructuring remains unlikely before 2013 in our view but a case could be made for a voluntary reprofiling, though this is easier said than done.
We have raised our eurozone growth forecast for 2011. While sentiment surveys are likely to lose ground in the period ahead, they will remain consistent with above-potential growth – keeping the ECB in tightening mode.
Japanese GDP plunged in Q1, adding to pressure on the BoJ to introduce additional policy stimulus. But there appears to be little desire to buy JGBs at current levels.
The uncertainties driving G10 exchange rate volatility recently have yet to be resolved. Hence the outlook for some key currency pairs, e.g. EURUSD, remains cloudy. The AUD is still at risk of breaking below 1.05.
BNP Paribas
Corporate & Investment Banking