YIELDS
The majority of FOMC participants thought risks to their outlook were balanced in June, the June employment report was encouraging, and yet the market assigned only a 20% probability to a December hike? We didn’t think that made sense. Now, the market-implied probability of a Fed rate hike in December is around 50%.Wethink that level is more appropriate, given the uncertainty surrounding the outlook for the global economy and financial markets. Event risks abound, including the EU-wide bank stress test results on Friday, July 29 which should have implications for the ability of state aid to be used to bail out investors rather than bail them in. And with the Fed meeting on Wednesday, July 27 and BoJ meeting on Friday, July 29, we prefer to wait on the sidelines for now .

Event risks abound, including the EU-wide bank stress test results on Friday, July 29, which should have implications for the ability of state aid to be used to bail out investors rather than bail them in.With the Fed and BoJ meetings upcoming, were main neutral on G4 duration. We discuss our strategic outlook for rates markets over the coming 12 months and include revised forecasts for yields across the curve.
Event risks abound, including the EU-wide bank stress test results on Friday, July 29, which should have mplications for the ability of state aid to be used to bail out investors rather than bail them in. With the Fed and BoJ meetings upcoming, were main neutral on G4 duration. We discuss our strategic outlook for rates markets over the coming 12 months and include revised forecasts for yields across the curve.
We discuss sovereign bond supply and central bank demand dynamics across the G4 through 2017. In the US, we look at seasonality affecting Treasuries in August. In the euro area, we update our sovereign spread forecasts. We favor tactical longs in 10y BTP/Bunds and also suggest buying 30y Francevs. Germany. In the UK, we expect lower gilt yields due to further MPC easing. We see potential for 2y gilts to outperform vs. Schatz and the long end to be supported by LDI demand.

We forecast break evens through 1H17. In the US, we move bearish breakevens strategically. We think the 5y5y measure could make new lows at 1.3%. In the euro area, we expect the rebound in Y/Y inflation to support breakevens. Short-dated break evens with ATM deflation floors look cheap. In the UK, < =5y breakevens should be supported by FX depreciation. Wethink that 30y breakevens have limited downside due to LDI support. In Japan, we think breakeven valuations are very cheap. GLOBAL BONDS