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Flash: Real increase in US treasury premiums – Goldman Sachs

FXstreet.com (Barcelona) - The sharp increase in intermediate maturity government bond yields has been driven by factors that have reinforced each other, stemming from a shift in growth expectations from levels that proved too pessimistic.

In addition, “Greater recognition that the pace of the Fed’s bond purchases is conditional on the evolution of the macro outlook and uncertainties surrounding the implementation of Japanese reflationary policies. A re-pricing of real rates has led the move in yields, with market measures of long-dated inflation relatively stable.” notes the Economics Research Team at Goldman Sachs.

After a difficult start, our trade recommendations to be short 10-year US Treasuries and 5-year German bonds have gained momentum. The UST trade reached its target and we recommended closing the position on May 29. As the sharp move higher in yields works its way through other asset classes, the tactical risk-reward has declined. Our end-2013 forecast for 10-year UST remains 2.5%, above the forwards, and we will be looking for other opportunities to trade the market from the short side. “We continue to recommend being short 5-year German BOBL for a target of 60bp, but raise the trailing stop to 35bp (the trade was opened at 31bp).” the team adds.

USD/JPY bounces off lows to trade flat

After falling to a 3-week low in the wake of lower-than-expected US personal spending and income, the dollar found support and trimmed losses, supported by above expectations Chicago PMI.
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