>US: Long end dominates ... for now (DBS)

INTEREST RATE STRATEGY

• Developments at the long end currently matter more to the steepness of the USD yield curve than what happens at the front end and the Treasury curve is likely to continue to flatten into rallies and steepen into selloffs

• With 10Y Treasury yields approaching 3%, the current bull flattening will soon be over and should give way to bear steepening in 2010

• Many expect rate hikes from the Fed in 2010, but rate hike expectations alone are not enough to produce a flatter Treasury curve – the curve will bear flatten substantially only when the Fed hikes rates

• The first Fed hike will mark the onset of the bearish curve flattening trend in Treasuries, but before that front-end steepening in the Fed Funds-to-2Y segment in 2010 is more likely to produce a steeper than flatter 2Y/10Y curve

• Historically the 2Y Treasury yield can trade at a wide 150-200bps spread to Fed Funds before the first Fed hike without causing the 2Y/10Y curve to flatten considerably.

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