/EGBS: BA/ML's Ralf Preusser and...>

US TSYS/RESEARCH: /EGBS: BA/ML's Ralf Preusser and Shyam S.Rajan are "bullish

EUR rates vs the US. The Eurodollar strip is now as flat as the Euribor strip.

Terminal rate pricing has converged. And the entire tightening in EUR rates vs.

the US was driven by real rates. We believe the factors for a correction are in

place: monetary conditions in the EA are now as tight as they were pre-QE, while

financial conditions in the US keep improving - this creates headwinds for the

EA and tailwinds for the US."

- They add that "positioning is long US Treasuries vs Bunds. The Fed's balance

sheet runoff will require the private sector to significantly increase

sponsorship of the UST market."

- They also say "next week's FOMC minutes should confirm the impending caps on

Fed reinvestments, as well as provide some guidance on how reinvestments above

the cap will evolve. Another wake-up call for the market could be the quarterly

refunding announcement which may indicate increasing UST coupon supply: the next

policy statement is scheduled for Nov. 1. However, as we discussed before, the

headwinds related to being past peak-QE may only build gradually."