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A model for estimating 10Y1M Eur fwd rate, based on the USD 10Y1M fwd rate and 2Y1M fwd swap rates in euro and USD, as a proxy of the forward guidance of the central banks shows a current undervaluation of around 30pb indicating that the recent movements of the European curves originated mainly by the correlation with the USD rates.

 

Interest rates, strategy, government bonds, bond yields, bond strategy, bond analysis, recommendations, bond investment, yieldsSource: Bloomberg, Intesa Sanpaolo

 

Two elements characterized the recent sell-off:

1) The recent correction has been entirely a movement of real rates: the real yield of 10Y TIPS increased from zero to the current 0.4%pb with the BEI narrowing by 4-5pb while 2Y TIPS real yield rose to -0.86% from a -1.22% low. European real rates followed the movement of the Treasury curve: the real yield of Bundei rose 45pb in the past two weeks with the BEI narrowing by 6-7pb. The correction seems consistent with an upward adjustment of growth expectations and also with a reduction of the growth differential between the two areas in view of the fact that while in the United States the monetary policy stance is becoming less expansive, in the Eurozone the effects of QE and of the energy price shock should fuel the recovery.

A model for estimating the 10Y UST real yield based on a set of macroeconomic variables and money market variables indicates that the 10Y TIPS is now close to fair value and, based on our macroeconomic scenario, it increases to 0.5%-0.6% on a 6-month forecast horizon, which implies nominal yields in 2.5% area. The risks on these forecasts, which are pretty in line with the market forward rates, are upwards only in case the Fed will postpone the first rate hike to 2016. The bearish impact of the UST sell-off on the German yields should therefore be limited to 20-30pb.

 

Interest rates, strategy, government bonds, bond yields, bond strategy, bond analysis, recommendations, bond investment, yieldsSource: Bloomberg, Intesa Sanpaolo

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