BofA: Pausing Or Stuttering - Cross Market Yield Dynamics

Bank of America note that “global rate markets are retesting year-to-date and multi-year yield highs. Pausing or ending hiking cycles is turning out to be far from straightforward. The duration of the pause, the capacity to cut, as well as the anchor provided by neutral rate assumptions are all being reassessed across countries.”

• “This is leading to meaningful and sometimes counterintuitive divergence in cross-market yield dynamics. We highlight three, focusing on the comparison between the U.S. and the Euro Area:”
• “The EUR front-end priced in more cuts than any other major market last week”
• “The EUR curve seems to incorporate higher 'term premia' than the U.S.”
• “The EUR long-end is cheap to the U.S.”
• “We believe the EUR front-end is too rich cross market. The term premium in the EUR curve could be challenged. We see receiving interest in the long-end of the EUR curve into year-end which should richen longer-dated EUR forwards cross-market.”