BUNDS: /SWAPS: Mizuho Believe The Market Is Too Excited About Fiscal Reform

Mizuho suggest that “markets are too hyped about near-term fiscal loosening in Germany.”

• They see “higher chances of minority parties outperforming in the election and blocking a debt-brake reform (45% odds). Even if they don’t, investors seem overly optimistic about the speed of the process (likely to be a Q425 story).”
• They go on to note that “outperformance for the minority parties (and AfD) would, in our view, drive a knee-jerk 10-20bp rally in 10-Year Bund yields, with a corresponding widening in German swap spreads”, given the debt brake preferences of those parties.
• If that scenario is avoided, Mizuho expect “Bunds to sell-off a bit further (testing the 2.60% area) before dip-buyers emerge and the bearish European economic narrative resumes (with 10Y moving towards 2.25% into H225).”
• Finally, they note that “if CDU/CSU+SPD reach the 50% threshold (40% odds), we expect German swap spreads to respect current ranges. However, if they need to onboard the Greens (15%), we see another 5-7bp of tightening in 10-Year German swap spreads.” Once again, this is based on preferences surrounding the future of the debt brake.