G-3 bond yields rose less than we predicted, mostly due to continued ECB aggressiveness, worries about the Chinese economy and the decline in oil prices. However, due to our view that the global economy with hold up quite well, we expect yields to rise moderately for the next two quarters. For US 10Y Treasuries, our target for March-end is 2.75%, while those for 10Y JGBs and German Bunds are 0.60% and 1.15%, respectively. For Australia we expect a rise to 4.0%. This implies (coupled with our forex targets), that including coupon income, the Citigroup WGBI (index of global bonds) should produce a -0.4% return from our base date of September 24th through December in USD terms and -1.0% through March. Thus, we are not positive on global bonds for USD based investors. This index, however, should return 0.7% in Yen terms due to Yen weakness (see below) at end-December and 1.0% at end -March. We target 10Y JGBs to have a flat return in Yen terms through December (and -0.3% through year-end), so we continue to have a preference for ex-Japan bonds for Japanese investors.

Thanks to Japan’s large monetary easing stance vs. a tighter Fed policy, coupled with a sharply negative trade balance and higher interest rates abroad, we continue to expect the Yen to weaken in the quarters ahead. We now forecast that December will finish at 110: USD, with 111 at March-end. The broadcasting effect of GPIF planning to shift to more towards overseas investments is also likely to continue to weaken the Yen.

Elsewhere in the Asia Pacific region, we expect the CNY to be flat vs. the USD at end-December and for the AUD to weaken to 0.88 vs. the USD by then (with 0.87 by March-end).

As for the EUR, the likely increase in inflation measures and a continually high current account surplus should allow the currency to end future quarters near the present rate, although likely with much weekly volatility. Our exact estimates at 1.28: USD at end-December and 1.27 at March-end.