View: View any further UST curve steepening opportunistically, like flatteners vs. 5yr
Resurgent equity markets continue to take centre stage with a raft of analysts’ papers regurgitating the likely benefits of more quantitative easing, cobbling this move together with evidence of economic green shoots (which higher equity markets supposedly tell us are there). That other favourite topic, what all this means for bond yields, is also back in the spotlight, centring on the fact that this uptrend in stocks will invariably trigger rotation out of safe haven bond markets into riskier assets, as evident during both previous instances of QE. But with the Fed committed to holding rates low until mid-2015 at the earliest now, with an additional bias for directing policy to flatten the curve via the twist, it’s difficult to see this juncture as a significant inflection point for core yields. Indeed, higher yields are one thing that would kill a recovery in a still debt heavy economy where dynamics are still ultimately deflationary. Rather it should exert shorter-term corrective pressures within the broader trading range, particularly at the longer-end of the curve, before yields edge lower once again.
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