Copyright 2014 Arbor Research & Trading, Inc. All rights reserved.

This material is for your private information, and we are not soliciting any action based upon it. This material should not be redistributed or replicated in
any form without the prior consent of Arbor. The material is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon as such.

UPDATE: 10y US/Bund and 10y Gilt/Bund Aiming at High Spreads From 2005
Since our last report on March 27
th
, 2014, key indicators supportive of further widening have pressed the UK/German
10 year spread through its 2005 high (117 bps). US/German 10 year have not seen follow-through after stalling near its
2005 high (122.3 bps) and AQAs Yearly Resistance at 122/130 bps. However more reasons than not buoy expectations
for maintaining widening trends by US and UK 10 year yields relative to German 10 year yields.


Key Indicators Include:
Front-end yields Dec 2015 Euribor are preserving their divergence from Dec 2015 Short Sterling and
Eurodollars. Short Sterlings are shifting to higher yields in expectation of 2015 rate hikes.
Normalized Swaption Volatility EUR volatility remains at subdued levels as USD and GBP volatility has
maintains higher levels indicative of fears over higher yields.
Economic Data GDP forecasts show stronger growth in the UK and US versus the Eurozone. Recent
positive economic surprises in the US are shifting its Citigroup Economic Surprise Index higher while the
Eurozones muddles along.
Technical Picture US/Bund 10 year and Gilt/Bund 10 year spreads maintain widening trends until AQAs
Monthly Supports (held 20 consecutive months) give way.

5/6/2014
Copyright 2014 Arbor Research & Trading, Inc. All rights reserved. This material is for your private information, and we are not soliciting any action based upon it. This material should not be redistributed or replicated in
any form without the prior consent of Arbor. The material is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon as such.

Front-yield yields and Central Bank Policy

Rebounding U.S. economic data beginning in mid-April is keeping rate hike expectations in 2015 after a string of sub-par
data in March. With unemployment rates falling into threshold levels set by both the FOMC (6.5%) and BoE (7%), eyes
are shifting to other metrics like labor slack, hourly wages, inflation, and economic surveys. A survey in the UK reported
by Reuters last week indicates 85% of forecasters expect a hike by the BoE before the end of 2015. The biggest wild
card lies in potential accommodative policy actions by the ECB. Demands for quantitative easing appear to have
tempered after higher than expected inflation in April (0.7%) and failure by the Euro to push through $1.40. No action is
expected at the Thursday meeting as more time is needed to establish a trend. Therefore many will focus on growth
and inflation forecasts offered after the June 5
th
meeting.
To illustrate the short-ends correlation to longer dated rates we look to Dec 15 Eurodollar vs Euribor and Dec 15
Short Sterling vs Euribor. The main driver for 10 year spreads is still falling on reassessments of front-end yields. Neither
spread has seen a significant reversal from their widening ways.



Normalized Swaption Volatility
Floating rate payors anxiety levels in the U.S. and
U.K. remain heightened as depicted by
normalized swaption volatility. In particular, 1-2
year tenors with 1 year or less expiry for the U.S.
and U.K. maintain a wide difference to a still
falling Eurozone. Lower fear over higher
rates in the Eurozone is not supportive of
narrower spreads to US and UK yields.

Copyright 2014 Arbor Research & Trading, Inc. All rights reserved. This material is for your private information, and we are not soliciting any action based upon it. This material should not be redistributed or replicated in
any form without the prior consent of Arbor. The material is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon as such.

Economic Data:
Unemployment rates have converged, however
QoQ GDP forecasts remain higher in the US and
UK through the end of 2014.




The U.S.s Citigroup Economic Surprise Index (CESIUSD) has been rebounding higher since early April, however U.S. 10
year yields have yet to follow higher. Nonetheless, continued data improvement in the U.S. should keep in place tapering
and rate hike expectations. Note CESI indices show moderately positive correlation to respective 50-day changes in 10
year yields. Continued muddling along to worsening economic data in the Eurozone may provide ammo for
accommodative action by the ECB.




Copyright 2014 Arbor Research & Trading, Inc. All rights reserved. This material is for your private information, and we are not soliciting any action based upon it. This material should not be redistributed or replicated in
any form without the prior consent of Arbor. The material is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon as such.

Technical Picture:
The US/Bund 10 year and Gilt/Bund 10 year spreads continue their long-term widening trends until AQAs Monthly
Supports give way. Note that Monthly Supports have held for 22 consecutive months. However we grow reluctant to
put on new widening positions the closer spreads move to Mthly/Qtrly/Yrly Resistance overlaps running from 110-131
and 112-128 bps for US/Bund and Gilt/Bund 10 year spreads, respectively.