EMU Haircuts – Just a Trim Please!

- Overview: "While the recent rally has left longer-dated US rates looking rich on our fair value measure, the same is not true for Europe. This lends support to our short US versus Europe view and also suggests that EUR curvature may be too low."
- Euro Rates Strategy: "While the sovereign haircut component of EU bank stress tests remains unclear, there is potential for this to promote further near-term volatility in EMU and Bund ASW spreads. Taking a medium-term perspective, we find current spread levels unattractive for maintaining long Bund ASW positions. Our base case scenario sees 10yr Bund spreads potentially returning to single digits during the second half of this year."
- Sterling Rates Strategy: "We examine the threat to gilts from inflation, explain our preference to position for fiscal progress via swap spreads rather than cross market or outright risk, and argue the case for selling 5yr swap spreads instead of 10years."
- Global Inflation Strategy: "Rising deflation fears and higher issuance are likely to weigh on TIPS break-evens in the coming months. In the euro market, we look at dislocations between 10s30s inflation curves."
- Volatility: "3m2y GBP straddles still look rich, both outright and vs 3m5y. Selling short-dated EUR volatility looks attractive, either versus 3m2y in USD or versus both 1m5y and 1m10y volatility in EUR."
Citigroup International Interest Rate Strategist 20100708