NORGES BANK: September Decision A Hawkish Cut, Markets Fade Knee Jerk Reaction

ING continues to see “value in eurozone government bonds as a robust hedge for future turmoil”. They note that 10-year Bund swap spreads are “still not back to the levels from before 'Liberation Day' or even from before the German spending announcement in March. So either markets have lost faith in the spending plans or demand for Bunds has structurally increased”.

• They suggest “real rates suggest that markets are still positioned for higher future growth, suggesting that the strong performance of Bunds is driven by strong demand”…“ The spending plans may not lead to stellar growth outcomes, it does reduce the tail risk of reducing to a secular stagnation scenario”
• ING “agree with markets that Bunds are an excellent hedge against US-driven market volatility going forward. USTs are still the more established safe asset, but to hedge against all possible scenarios, Bunds may have turned into the better bet”…“ Therefore, despite German spending and quantitative tightening adding upward pressure to Bund yields, we think the scope to diverge from swaps will be limited”.

Large Block trades in Germany, while they have gone though a couple of minutes apart, these look closely weighted and suggest a potential Steepener:

• DUU5 25.1k bought for 107.02.
• RXU5 ~4.6k sold at 128.83.

A new 14 years high now for the German 30yr Yield, it edged at its highest level since August 2011 last Week, now best level since July 2011.

Next target is still eyed at 3.40%.

Today, reference 113.04:

• 3.40%= 112.15.

Since the Bund and Bobl have caught up, the German 5s/30s stays below the 103.00 figure.