Adjusting to the new regime

- Overview: "Additional Fed easing measures are likely to be required to tighten the UST-Bund spread further."
- "Scope for significant yield curve steepening may be limited by recent rises in Libor rates."
- US Rates: "With yields significantly below our fair value levels we look at ways to gain exposure to an upward correction; 2s10s steepeners in UST remain correlated to a short duration trade but carry better than outright shorts."
- Euro Rates Strategy: "We recommend taking off short peripheral and fundamental-based spread positions in the current environment of positive news, buoyant mood, and supportive technical factors. There are, however, some remaining relative value opportunities which we highlight."
- Sterling Rates Strategy: "Recent bull flattening of the 2s-10s gilt curve is consistent with anchored short rates, declining inflation and supply expectations and the ongoing grab for yield. We see both 2s-10s and 10s-30s as being close to fair value. However, going forward we expect to see the longend outperform. This should reflect in higher levels of yield curvature."
- Global Inflation Strategy: "The combination of positive cashflows and a large month-end extension should bring much needed relief to euro break-evens in the week ahead. UK real yields are under pressure ahead of supply."
- Index-linked Index Projections: "We project a duration increase of 0.43 in the EUR ILSI at the end of July. There have only been three bigger monthly increases in the last three years."
- APAC Rates: "In Japan, we like 2yr forward 5yr/15yr – 5yr/20yr curve flatteners in swaps or in conditional space."
- "In Australia/New Zealand we find little value in receive AUD versus pay NZD trades, unless the RBNZ hikes by more than 150bps relative to the RBA."
- End-July EGBI projections: "We expect only a small duration increase in the EGBI at the end of July. Projected index changes point to support for Germany, Spain, Italy and France."
Citigroup International Interest Rate Strategist 20100722