The Morning Call

The Week Ahead: 1st February – 5th February 2010
•We continue to look for higher yields and wider spreads in the near term but suspect that a correction may be overdue.
•The US market displays a seasonal tendency to outperform the trend versus Bunds in February and March.
•Relative cash flow dynamics offer additional support to seasonal outperformance of the US market versus Europe in February.
•Given our expectations of an inflation spike in the UK and implications for policy rates, we believe 2yr GBP-EUR wideners look attractive.
•Seasonal patterns suggest avoiding short-dated euro break even inflation spreads in February.

The Morning Call – Monday 1st February 2010


Historically the market displays a strong bias towards establishing the trend for the year during the first quarter. For 18 out of the last 20 years, the first quarter market move has set the tone for the year as a whole. Thus our medium-term outlook leads us to favour selling rallies rather than buying dips.

We remain comfortable with our core views for 2010: higher yields, eventual euro out-performance, significant gilt-underperformance and wider EMU spreads. However, given the pace of some of theses latest moves, we suspect that in the medium term there may be some scope for a correction in some of these trends.

We see little scope for yields to break their ranges as yet, since range trading is likely to persist while policy stimulus is absent. With yields currently in the middle of their trading ranges, this is likely to weigh on volatility. Unless there is a sharp turnaround in the economy, or a faster than anticipated reversal in monetary policy, 3m and 6m implied break-even levels look unlikely to be
broken.