European rates Duration preference: neutral EUR (DE) 10-year (29 June): 1.6% (last month: 1.4%) . UBS View EUR (DE) 10-year (6-month forecast): 1.7% RECOMMentetions ¢ We believe the reasons for the recent rise in Bund yields are numerous: First, signs of more Eurozone Tactical (6 months) integration (e.g. European bank deposit guarantee) combined with the recapitalization of Spanish banks. e Long term Bund yields would fall lower, Second, the firm commitment of central banks to act if downside risks materialize (possible quantitative in case of rising Euro zone break up easing by the BoE and a higher probability of a ECB rate cut) and finally, Greek election results met probability. In contrast if Germany would expectations. However, this rise was muted given the extension of Operation Twist, weak global / German need to support the periphery further data and Spain's return to the spotlight. Bund yields would rise. We expect the ¢ Over a three- to six-month horizon, we expect growth momentum to remain subdued but still in positive enarket to escillate bebween these two territory; we should have more information on how Spain and Italy are handling their adjustment d to et pal programs. Also, the new pro-memorandum Greek government should limit safe haven inflows, and thus cases and recommend to stay neutral on limit short-term downside risks to yields. duration tactically. * In the UK, economic data continues to be mixed as the recovery continues but is prone to external shocks. Strategic (1 to 2 years) The recent liquidity provision announcement by the BoE has confirmed these concerns. ° Yields have significant upside potential ¢ In Switzerland, yields have traded range bound owing to conflicting economic data. The SNB stressed over the next couple of years. Thus clients increased downside risks to the economy and stands ready to act. However, we believe Swiss yields will with a long time horizon should focus on gradually normalize. bonds with short and medium matur