In the US, the resumption in activity has been brought about by the falling number of COVID cases and increasing mobility which bodes well for the outlook. We maintain our recommendation of shorting 20y Treasuries as the improving backdrop argues for lower safe asset premium. With rising uncertainty about the Fed’s reaction function, we are turning neutral on our 10s30s swap curve steepener recommendation.
US Treasury yields declined last week, partially reversing the selloff amid mixed economic data and a slight uptick in risk aversion, particularly in the Euro area. Figure 1 shows that 30y German government bonds rallied 10bp, leading the move lower across bond markets though US Treasuries were not far behind. Risk assets underperformed, particularly in Europe with stocks down 2-3pp. Instances of rising cases in Europe likely played some role.
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