Pension Solvency and the Long-End

- "Government bond yields fell sharply in August, contributing to a further easing of financial conditions. US 10-yr Treasuries reached our forecast of 2.5%, before bouncing higher. Valuations are now roughly ‘fair’, according to our Bond Sudoku model."
- "The prospect of further quantitative easing by the Fed, amid ongoing uncertainties over the trajectory for growth, argue against a quick reversal of the rally. But, based on our global macro projections, we think the cyclical trough for bond yields has already been seen. We forecast a steeper US 2s-10s curve than the forwards are discounting. We would position for a flattening of the 10s-30s Gilt curve against Germany. This ‘box’ spread has co-moved with the level of rates lately."
- "The rally over the past month was amplified by asset-liability management flows, particularly in continental Europe. We have commented on these dynamics in our weekly Bonds Snapshot publications. Here we present our updated Pension Solvency Indices, which help track changes in solvency positions through time and across regions."
- "Peripheral EMU markets have been volatile again, but the market has been much more discriminating than it was in May-June. Ireland is under pressure because of the contingent liabilities from banks. Portugal and Greece are suffering from growth concerns. But Italy and Spain are now participating in the rally. We have recommended long positions in 10-yr Italy vs. France, and in 30-yr Greek bonds, which already discount a substantial credit risk premium."

GoldmanSachs Fixed Income Monthly Sep2010

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