YIELDS

Global Yields and Inflation Products

Yields in the US and Japan have pressed higher while yields in the euro area and the UK have remained low. We remain neutral on duration across the G4, but suggest UST 2s5s and JGB 5s7s steepeners and along UKT 30y vs. DBR 30y cross-market trade.

In the US, we suggest UST 2s5s steepeners. We think the market could take th implied probability of a September rate hike toward 50%. In the UK, we suggest long UKT 30y cross-market vs. short DBR 30y in reaction to the BoE’s QE announcement. In Japan, we suggest JGB 5s7s steepeners, which offer exposure to continued fast money selling of JGB futures and real money buying of shorter maturities.

In the euro area, we review the ECB’s July asset purchases and highlight the extent to which core NCBs were pushed further out the curve as a result of lower yields. The eBMIs have whipsawed back to a bearish view on periphery/core, while the semi-core/coresignal remains negative, but we prefer remaining tactically long IK vs. RX. In Japan, we see ample scope for a reversal of recent curve steepening, with Tuesday’s 30y JGB auction a possible catalyst.

We remain tactically neutral, yet strategically bearish on break evens. We show how seasonality in breakeven moves in August could add a downward bias to break evens. In 9 out of the last 10 years, break evens ended lower in August. We also examine the claim from Dallas Fed chair Kaplan that inflation may be rising ,and highlight why looking at trimmed means over the last six months can lead to misleading conclusions about the current inflation trend.

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