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Summer seasonality and the search for yield

- Overview: "Seasonal patterns may provide support for rates markets but current levels look unsustainably low unless the economy deteriorates markedly."
- "Elevated curvature in Euro and Sterling and still too high volatility in short expiry options provide opportunities to enhance returns without duration risk, in our view."
- US Rates Strategy: "As yields fall, speculation has risen as to the possibility of a further squeeze. We examine the tail scenario of a double dip and conclude that it is unlikely that we will see 10yr yields fall as low as Dec 08 levels."
- Euro Rates Strategy: "We examine the market impact of Solvency II and conclude that it is unlikely to show the aggregate position of EU insurers as being significantly under capitalised, if at all. It is unlikely to herald further significant shifts out of risk assets, but there may be some marginal shift in this direction. The likely impact on the vol market remains uncertain but should not be dramatic unless yield levels continue to fall sharply."
- "It seems to be only in 2012 that countries start to reduce their debt burdens. Portugal and Ireland look particularly vulnerable to an increase in yields. The countries reducing their average funding costs by the most over coming years are Germany, Finland and the Netherlands. 5y5y swap spreads in Spain and France look out of step with their fundamentals.""
- Sterling Rates Strategy: "Despite the improving fiscal outlook, we see little appeal in duration risk in the UK."
- "With policy rates likely to remain stable for an extended period, as fiscal tightening takes hold, short expiry gamma looks like a sell."
- APAC: "We remain bearish on JGB yields in the medium term but think risk aversion and cash balances could continue to provide near-term support."
- "In Australia, we retain our bias for paying the belly of a 2s-3s-5s butterfly. While in NZD we think hikes are too aggressively priced relative to the AUD market."
- Euro Supply Outlook for July: "Redemptions (€77bn) and coupons (€40bn) easily outweigh gross issuance (€69bn). This €48bn imbalance should put further downward pressure on yields. We identify the countries with the most and least supportive net cash requirements in July."
- Relative Value Analysis: "We highlight switch opportunities in the 6-8y and 30-yr areas of the Bund curve and in the 8-10yr sector of the DSL curve."
Citigroup International Interest Rate Strategist 20100701

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