BCA Research: The “policy divergence” theme is still in play; favour Bunds to Gilts and Treasuries.

The “policy divergence” theme is still in play; favour Bunds to Gilts and Treasury’s. In terms of the ECB, the rollover of long-term inflation expectations is undoubtedly quite uncomfortable. The last thing the central bank needs is another deflation shock. Lower inflation expectations would push up real short-term interest rates, threatening to tip the Eurozone economy into a Japan-style liquidity trap. The combination of depressed inflation expectations and slowing growth momentum would send Bund yields sharply lower as investors discount “QE-forever” from the ECB. The FOMC appears determined to hike rates this year. Whether one agrees with the FOMC or not, policymakers are anxious to lift rates off of the zero bound, now that the labour market is in the vicinity of full employment. The market is still pricing in about a 50% chance of a September rate hike, implying that the short-end of the Treasury curve remains at risk. To access this and more insights, click the (VIEW LINK)