Europ ean rates Duration preference: neutral EUR (DE) 10-year (24 Oct): 1.6% (last month: 1.6%) |§ Recommendations UBS view EUR (DE) 10-year (6-month forecast): 1.8% . ¢ Bund yields have trended sideways over the month, lacking a directional trigger. Markets still await Tactical (6 months) crucial developments in Spain, Greece and the extent of the US fiscal cliff, and have not fully reflected e If the ECB were to intervene with massive mixed but stabilizing fundamentals. However, when compared to the all-time lows witnessed in August amounts in the peripheral bond markets, (~1.2%), yields are still trading at decisively higher levels. This is supported by the ECB announcement to Bund yields would rise more significantly. act as a lender of last resort by intervening in the secondary markets with unlimited and conditional But, for the time being, we expect only government bonds purchases. In addition, the open-ended Fed stimulus hinging on the labor market d . . h d contributed to improving sentiment. This provides a cap for short-term peripheral yields and a floor for moderate interventions that do no Bund yields. meaningful harm to Germany's credit ¢ Over a six-month horizon, we expect yields to trend slightly higher, returning to previously higher ranges. quality. We recommend staying neutral on The central bank backstops have already improved confidence and resulted in convergence between the duration tactically. periphery and the core. This speaks for slightly better growth prospects and thus slightly higher yields. ¢ However, growth is still structurally weak, and short-term uncertainties (US elections, fiscal cliff, Spain) Strategic (1 to 2 years) remain. Consequently, short-term downside risks persist around year end. The ECB, however, will limit the —« Yields have significant upside potential spread from widening, providing a bottom to Bund yields as well. over the next couple of years. Thus clients ¢ In the UK, economic data stabilized and we expect the Bo