US rates: led by Bunds

The front-end rallied following the dovish June FOMC meeting. The primary trigger was the downward shift in the 2015 funds rate projections with 5 members now expecting only one hike this year, and now is only pricing in about a 40% chance of a first hike in September and less than four hikes in 2016.

The front-end of the yield curve is not that mispriced at current levels. The long end remains hostage to global factors, primarily from Europe. Changes in Bund yields are likely to precede changes in 10y US Treasury yields recently, in contrast to previous episodes when the causality was in the reverse direction. 

One possible reason for this shift could be investors reallocating money from negative yielding European short rates to European long rates and US Treasuries. As long as negative yields in the front end of Europe persist, Bunds are expected to continue to lead 10y US Treasuries. 

"Looking ahead, we are bullish given the negative supply dynamics in Eurozone sovereign bonds in July. This should help drag US yields also lower in the near term", says Bank of America.