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May 31, 2013
Flash: Weighing the impact of QE tapering in US – Goldman Sachs
FXstreet.com (Barcelona) - The tapering of the Fed’s bond purchases could contribute to raising the term premium along the US treasury yield curve.
According to the Economics Research Team at Goldman Sachs, “Using an analytical framework introduced in February, we estimate that the direct effect of a shift in expectations around the duration and magnitude of QE3 would be relatively contained. However, there could be larger effects from a ‘present valuing’ of the shrinking Fed balance sheet in the more distant future.”
Empirical analysis suggests that, as spreads have tightened to levels consistent with macro fundamentals, Italian BTPs and Spanish Bonos have resumed trading more like ‘duration’ instruments rather than predominantly as credit products. In light of this, we now advise taking EMU sovereign risk on a spread basis; our recommendation to be long 10- year Italy vs. France (initial target: 180bp) is consistent with this approach.
According to the Economics Research Team at Goldman Sachs, “Using an analytical framework introduced in February, we estimate that the direct effect of a shift in expectations around the duration and magnitude of QE3 would be relatively contained. However, there could be larger effects from a ‘present valuing’ of the shrinking Fed balance sheet in the more distant future.”
Empirical analysis suggests that, as spreads have tightened to levels consistent with macro fundamentals, Italian BTPs and Spanish Bonos have resumed trading more like ‘duration’ instruments rather than predominantly as credit products. In light of this, we now advise taking EMU sovereign risk on a spread basis; our recommendation to be long 10- year Italy vs. France (initial target: 180bp) is consistent with this approach.