ECB Still Lead Actor in Bund Performance Despite Le Pen Cameo

  • French bonds no longer seen as haven on political jitters
  • ECB remains the dominant factor behind Schatz-Eonia widening

This month’s rally in Germany’s two-year bonds may have been stoked by political risks surrounding France’s presidential election, but are likely to find support regardless as a scarcity of collateral seems set to worsen, Bloomberg strategist Tanvir Sandhu writes.

The yield on Schatz notes has fallen 23 basis points this month, coinciding with increased stress in the repurchase market. The difference between two-year German bonds and the overnight index swap rate is now 60 basis points, compared with 40 basis points at the end of last year and eight basis points on Jan. 22, 2015, when the European Central Bank embarked on quantitative easing.

While French bonds are no longer trading as a safe asset as investors selectively price the prospect of a potential victory for anti-euro candidate Marine Le Pen, this may account for about 20 basis points of the widening in the spread. Any fading of the Le Pen risk premium may result in this component being unwound, but the underlying driver of the spread remains the ECB.

Beyond that, what may work against any moves to fade the rally in Schatz is the ECB’s bond-buying. The monthly average maturity of its purchases may decline given that the larger stock of bunds available for buying is in the front end.

Short-dated German bonds may also continue to find support from non-euro central banks investing increases in their euro reserves that stem from curbing strength in their own currencies.

* Note: Tanvir Sandhu is an interest-rate and derivatives strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice.

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