Why is the German Yield Curve Sharply Steepening?
The German yield curve has experienced an impressive steepening of almost 60bps in just one month! This significant movement can be attributed to several key factors that are driving the shift: Fundamentals and Economic Outlook: One of the primary drivers behind this steepening is the market's reassessment of the potential avoidance of a recession. There's a positive repricing of economic fundamentals, suggesting improved prospects for growth and stability. Additionally, there's growing concern about structural inflation running higher than initially expected. Notably, the German 5-year breakeven rate has surged to 2.63%, reaching its highest level since 2009, which has translated into higher long-term yields. Front-End Yield Curve Repricing: The recent decisions made by the European Central Bank (ECB) have also played a role in the steepening. Firstly, the ECB chose to no longer remunerate the bank's minimum reserve held at the central bank. Additionally, today's surprise decision by the Bundesbank's Executive Board further impacted the market. The decision was to remunerate domestic government deposits held with the Bundesbank at 0%, starting from 1 October 2023. Both of these developments could potentially increase demand for German short-term papers. Source: Bloomberg.
The fact that Retail investors are rapidly buying the iShares 20+Year Treasury Bond ETF (TLT) - despite the bond bloodbath - could mean that the sentiment is far from being oversold
From a contrarian perspective, this is NOT a positive for long-dated bonds. Source: The Daily Shot, Bloomberg, VandaTrack
Shorting US 10y bonds seems to be one of the most crowded trades at the moment
Among the shorts, Billionaire investor Bill Ackman. To his opinion, if long-term inflation is 3% not 2%, the 30y Treasury yield could rise to 5.5%. In contrast, Warren Buffett has announced buying positions in 10y US Treasuries. Source: Bloomberg, HolgerZ
Before dumping your government bonds think twice
Over the past 40 years, US treasury yields have always declined six months after the last Fed hike. Source. Edward Jones
Junk bonds are outperforming as soft landing narrative builds
High-yield has returned 6.50% this year vs 3.70% for high-grade.
Junk bonds are emerging as a sweet spot in global fixed-income markets wracked by some of the worst volatility this year, as investors increasingly bet that major economies will avoid recession for now.
Source: Bloomberg
Bonds and equities re-correlate...The recent acceleration in yields appears to have had an effect on long-duration risk-assets...
Source: Bloomberg, www.zerohedge.com
Note that US Sovereign risk (aka CDS on 1-year US Treasury) was completely unmoved by the Fitch downgrade.
Source: Bloomberg, www.zerohedge.com
Treasuries haven’t been this ineffective as a stock hedge since the 1990s. The one-month correlation between the two assets is now at its highest reading since 1996
Source: Lisa Abramowicz, Bloomberg
