The implications of extended QE

- Overview: "A raised probability of further QE by the Fed extends the potential upside for US Treasuries slightly. We recommend unwinding short UST versus Bund trades but retain our outright short Bund recommendation."
- US Rates: "With an increased likelihood of further Fed balance sheet expansion we examine the likely structure of such a move and its potential impact."
- Euro Rates Strategy: "On a relative basis we are more worried about Portugal than Ireland. We suspect the market will find it much easier to believe in the risk/reward of being short Portugal than long. Italy remains our long of choice."
- Sterling Rates Strategy: "Speculation of further QE in the UK looks overdone. We suggest fading the recent strong performance of short-term sterling contracts and the belly of the gilt curve."
- Global Inflation Strategy: "TIPS break-evens are vulnerable if market expectations for QE are disappointed. 10yr euro real yields look historically attractive versus TIPS. Euro linker issuance for 2010 is around 80% complete."
- APAC Rates Strategy: "We continue to recommend flattening trades in Asia: 7s30s swap curve flatteners in JPY and 3s10s via futures in AUD."
- Flow Analysis: "Buyers of Europe remain more confident than buyers of the US, where net demand has been weak recently. In Europe, Italy, followed by Germany has seen the strongest net buying over the past month."
- Month-End Index Projections: "We expect a significant increase in the EGBI at the end of September. At a country level we see the largest weighted duration increases in France, followed by Italy and Germany."


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