Views and Ideas

German short yield keep going down despite an improving macroeconomic situation

27 febrero 2017

More of the same: the rally in German 2Y bonds continues, even more than last week. Reasons?

French elections of course, but also asset swap spreads widening due to central banks purchases. We have now extreme German bond yields that are completely disconnected from macroeconomic fundamentals:

  • Europe GDP is expected in Europe to reach 1.5%
  • Inflation in 2017 is expected at 1.5%
  • Leading indicators : Eurozone PMI at 56 (5 years high) ;  Zew, IFO are robust, etc

Macro fundamentals improve, everything is going into the right direction, but German bonds rally nonetheless. On the other hand we must admit core inflation remains only at 0.9%, and there is some political risk but these things seem to be priced extremely dearly in German front end while other markets do not show any stress (EUR, equities, volatility…). Here is a graph with German 2&5yr bond yields and inflation (we could have done this chart with Zew, IFO, PMI, you name it).

Next 3 coming weeks will be filled with political and macro news:

  • Euro inflation on February 28th
  • ECB on the 9th, Fed/BOE/BOJ on 16th March
  • Article 50 activation on 9/10th March
  • Dutch elections on 15th March
  • Trump fiscal plan announced around mid-March
  • ISM US on March 1st

Kind Regards.

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