European weakness should mean the long end of yield curve stay low as the ECB raises the refi rate. Just as for USD recently, EUR barbelling now seems appropriate.
Bond Outlook [by bridport & cie, November 9th 2005]
| To the two reasons for recent dollar strength, profit repatriation and relatively attractive yields, can now be added the French riots and fear of them spreading to other European cities. All three are temporary effects, assuming the French situation does abate and Trichet makes good on his near-promise to raise the ECB's refi rate. In the week since we debated how the EUR yield curve would develop (flattening via a stable long end vs. an across-the-board rise), we have rather moved back to the former. The weakness of Europe, which will not be helped by the painful but necessary raising of the German VAT rate, and now exacerbated by the racial problems, suggests that the yield at 10 years is more likely to stay quite low, i.e. the euro zone will follow the US experience, more or less. That would support the wisdom of barbelling, which we have therefore now introduced into our maturity recommendations. |