BONDS: Swiss - Bund Spread Widening Drivers Could Fade From Here

At 228bps, the Swiss - German 10y government bond yield spread continues to print close to the widest levels on record following the extension of the widening which started 2022.

• From a broader perspective, the moves lower in Swiss 10y yields seen over the past two years are striking when viewed against global core FI markets, and highlight the unique position the Swiss economy finds itself - characterized by low and slowing inflation and a prudent federal fiscal position.
• The more recent extension of the longer-term trend of widening of the Swiss - Bund spread was underpinned by:
  • a) the pronounced dovish repricing of near-term SNB expectations relative to the ECB, which notably outpaced a similar move in the Eurozone despite the SNB's proximity to the zero lower bound.
  • b) the Bund curve steepening outpacing that of Swiss government bonds amid rising term premia in Germany following the fiscal expansion plans of the country.
  • c) some haven flow amid the pronounced CHF appreciation following the firmer US trade stance might also have been at play.
• Some of these factors might be running out of steam looking forward: CH STIR is already pricing -0.35% terminal overnight rates in Switzerland, leaving limited room for further downside adjustment, and CHF has already pared some of its gains seen during April (the CHF REER is ~2.5% off YTD highs). This leaves the German fiscal picture as well as global core FI steepening trends as key for further moves in the spread.

• From a technical perspective, key levels to watch towards further widening would be the 231bp seen on May 14 as well as the lowest close in recent decades, at 239bps seen in March 2022.