We see US data turning up in the coming weeks and hope the holiday period will lead to an easing in EU sovereign tensions. That will support our tactical defensive views. In Europe, however, cash flow is positive and the uncertainties around the Eurogroup meeting and the EBA stress tests suggest prudence on sovereign risk.
In the US, the risk-on/risk-off pendulum remains in full swing. Price moves tend to overshoot. Take advantage of this by opportunistically selling 30-year Treasuries prior to Thursday's auction.
As the front end of the yield curve gets pushed down onto the x-axis, the curve flattens and the term risk premium is eliminated to a large degree. This creates good roll-down opportunities in US 3M/1M OIS spread forward flattener trades.
The EUR 1-2y is not yet ready to initiate a flattening trend. Coupling EUR 1-2y steepeners with the USD flatteners, with the equivalent or lower notional, enhances the rolldown and makes the position less dependent on market direction.
We still like long positions in euro breakevens, particularly in 10s. Sure, there are headwinds - sovereign worries, oil price falls and negative carry. But the tailwinds are stronger - attractive valuations, light issuance, and strong pass-throughs.
Beware buying Portugal covered bonds, even after the large sell-off. We fear forced sellers on index changes. Prefer AAA agencies.
The PBoC rate hike should be the last of the year. We maintain our view to receive CNY NDIRS 2yr.
The 20yr JGB sector has richened too much. Maintain conditional bear-flatteners on 7y-20y JPY.
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