Research Team at BNP Paribas, suggests that ultra-low yields mean investors must look harder than ever for carry, but there are many near-term risks for bonds (in both directions). Key Quotes “Assets with the strongest carry should continue to perform well, ie inflation-linked products (globally) and peripheral euro area sovereigns. Curvature trades earn positive carry, while mitigating directional exposure. The expected EUR -123bn net supply in the coming weeks should drag real yields sharply down. Germany and France are the most exposed to this development. The 10y Bund yield could fall back close to its lows. We expect the bullish tone to resume next week and more flattening pressure on curves. Keep receiving the 10y swap and the 2s10s30s fly. Core and semi-core spreads could benefit from a change in asset allocation by Japanese real money. Last week’s ECB favours peripherals, although we are more bullish on peripheral yields than on spreads versus Germany. We still find the level of inflation implied by front-end linkers too low compared to BNPP forecasts, which have been raised by around 0.3%. We stay positive on UK and EUR breakevens, and keep our key inflation recommendations. We expect the EGB Index duration to increase by 0.06 years. Belgium’s duration will increase the most. In index weight Spain and France will increase the most (+0.11%), Belgium and Germany will drop by 0.19% and 0.17% respectively. We expect EGB gross supply to remain at around EUR 11-12bn in the week ahead, the same as last week. Redemptions in Italy & Belgium will total EUR 13.8bn and there will also be EUR 5.7bn of coupon payments in these countries. EGB issuance will only take place tomorrow, when Germany will tap the OBL Apr-21 for EUR 4bn and Italy is scheduled to issue medium-long BTPs.” For more information, read our latest forex news.