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Bond Outlook November 23rd

There has been a shift in interest expectations towards the Fed not going quite so far and the ECB raising rates. Complacency on US macro-economic policy is now current.

Bond Outlook [by bridport & cie, November 23rd 2005]

The current oscillations of the USD against the EUR seem very directly linked to relative yields, with the slight rider that talk of changes in interest-rate policy is enough to move markets. As we write, the EUR has moved up a little as a result of Fed minutes suggesting that a steady increase in the Fed rate to 5% in early 2006 can no longer be taken for granted; 4¾% is mooted as the likely ceiling. Likewise, Trichet is rather firmly indicating a 25 bp rise in the refi rate in early December, but letting it be understood that it might be a "one-off" adjustment.


Another way of looking at the relative USD/EUR yields is the 10 year yield spread for the two currencies based on government bonds. From the beginning of this year the spread was widening until mid-September (from 50 to 120 bp). There then followed two months of no change. As of early November, corresponding to when rate rises in the euro zone were considered likely, the spread has moved back below 100.

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