Last night, I pondered whether it might be time to jump on board the bund short bandwagon.
Actually, I pondered that weeks ago, but the trade got some attention on Wednesday thanks to comments from Kyle Bass who basically reiterated what we already knew which is that real rates in Germany simply can’t stay this low forever.
A weak 30-year auction only added to the bearish sentiment.
Here’s what we’ve seen in 10s this week:
Consider that as you read the following commentary out Thursday morning from SocGen, who sums up pretty much everything you need to know in one concise paragraph.
The moves over the past two days have been large, with long-end USD swap rates up some 14bp. Technical signals are bearish with the 10y Bund at 0.475% this morning (after flirting with 0.50% at the opening), well above the December high (Graph 2). Our technical analysts warned that a close above 0.47% would likely precipitate a move towards 0.67%/0.75%. Even the 10y gilt is threatening to break out of its 3y channel. There has not been one particular factor behind the selloff, though President Trump’s push on the Dakota Access and Keystone XL pipelines, the promise of deregulation, the tough stance on trade and immigration (potentially inflationary, if negative for global growth over the longer run) have surely contributed. The 10y TIPS breakeven has just reached a new cycle high at 2.07%. The DJ has surged above 20k. Bear steepening has been the name of the game in G4 rates (though JPY rates of course have been resilient). The recent clarification from PM May and the UK Supreme Court (which make the triggering of Article 50 in March a near certainty, with little trauma to be expected in the near term) also reduces uncertainty, freeing up the animal spirit. Details on the timetable for triggering Article 50 should emerge Thursday. Global economic data has been solid – continuing the theme of our latest FI Weekly (Getting down to the facts).