German Bunds heading back up

After some aggressive selling recently in bonds as stocks continued upwards, we have bounced of 120 support in the Bund and are heading higher again. This was a double bottom as can be seen below. Next target is 121.50, depending on whether we continue this rally in stocks.

Euribor spreads have stabilised somewhat after breaking new highs in the front months. Sep10-Dec10 spreads are now trading in a 36-39 range, where as the back months are feeling selling pressure as the curve continues to adjust to rate expectations.
Today action is slightly muted as we wait for the fomc rate decision.
The big issue at Wednesdays monetary policy decision is whether or not the central bank will expand its Treasury purchases. We believe that the central bank will keep its schedule unchanged but that the door will be kept open for possible future changes.
Economic data have continued to improve and we believe that this will be noted in the FOMC statement. Inflation pressures on the other hand remain subdued. Hence we expect the statement to reiterate that the Fed funds rate will be kept exceptionally low for an extended period.
Overall the meeting could turn out as a non-event. Markets are pricing around 110bps of tightening over the coming 12 months primarily beyond Q1 2010 and we don‟t expect the FOMC meeting to alter current market expectations much.
That said, the range of possible outcomes is vast. Markets are likely to be unusually sensitive to the wording about the purchase programs or any signal regarding the future path of policy.