Europe: Bunds to underperform treasuries, gilts to underperform bunds – TDS

The fact that the US and Euro area are at different stages of the business cycle has been well-reflected in the cross market spread since the beginning of the Euro crisis, suggests the research team at TDS.

Key Quotes

“The end-June selloff led by hawkish central banks saw the beta spike to 0.9. However, with the ECB opting for a dovish normalization, the average beta since September has been 0.6 despite the Fed and BoE following a hawkish path.” 

“However, with the ECB embarking on the road to policy normalization, we expect to see a gradual compression of the 10yr Treasury-bund spread. This transmission should flow from the real yield spread, which is still not reflecting the uptick in growth momentum in the euro area. This is consistent with our US strategists looking for Treasuries at 2.65% at the end of 2018, while we forecast 10yr bunds at 0.80% by the end of 2018.”