Global Rates Trader: Bonds' Redemption

Equity market turbulence and steep energy relief since the end of October have helped to anchor G4 10y yields 25-to-50bp below the recent highs. While it hinges somewhat on some diminished risk asset volatility and energy price relief holding, we think the pieces are in place for yields to settle into a range and rate volatility to decline. For the US, the erosion of front-end hike risk and a healthy labor market favor keeping longs towards the belly of the curve; our preference is still to own 5s on the 2s5s30s fly, albeit with tighter stops. The move has taken real yields to historically cheap levels on a beta-weighted basis versus nominals, and we add a long 10y TIPS versus a 0.75x short 10y nominals recommendation (entry: 102bp; target: 115bp; stop: 95bp). The European front-end is also likely to be harder-pressed to take out a lot more hike risk in the near-term, but the weaker forward-looking growth outlook bodes favorably for 5s outperforming on the EUR curve. The last couple of