Goldilocks and the Three Bears
USTs, Bunds, Gilts: Three slightly different bears
The global economic outlook currently is one of Goldilocks: surging economic growth in the US, UK, and Europe that broadly will not generate enough inflation to elicit central bank tightening responses. Only the US expected to see above target inflation but not sustainably until late 2022. For our above consensus growth forecasts, see our recent Economic Quarterly: Rational Exuberance.
As this outlook has evolved, bond markets have adjusted across the US, UK, and Europe, though to varying degrees. This piece serves to put the moves in a historical context, and summarize our expectations for the future. In addition, on back of our analysis, we recommend the following:
US: Sell 5yrs at 0.75% or pay 2y2y at 0.80%, sell 5s on 2s5s10s butterfly at -15bps.
EGBs: Buy US 30yr yields vs. 30yr bund yields, hold EUR 10s30s steepeners and long 5yr EURi. We also hold long Italy vs. France and Spain, and are watchful for outright bund shorts in the next few weeks.
UK: Hold short 10yr gilts targeting 1.00%, short 15yr RPI (see here) which is the richest sector of the UK inflation curve.
Please see the attached pdf for the full analysis
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