We Haven’t Seen This Since The Sovereign Debt Crisis

We Haven’t Seen This Since The Sovereign Debt Crisis

I’ve talked a ton over the past two weeks about the dramatic richening at the front end of the German curve.

There’s been no shortage of debate regarding what factors are at play. Well, actually that’s not right. Everyone knows what factors are at play, it’s just a matter of determining which factors are most influential.

Essentially it comes down to this: do plunging Schatz yields primarily reflect the ECB’s decision to buy below the depo rate or is this mostly a mad dash for safety ahead of the Dutch and French elections?

Whatever’s at work, it’s certainly manifesting itself in a variety of highly visible ways, including iTraxx Main recently trading inside of 2Y swaps and a soaring number of € IG issues trading with negative spreads. Below, find another manifestation courtesy of Bloomberg’s Tanvir Sandhu.

Via Bloomberg

  • Schatz Volatility Versus Bunds Hits Sovereign Debt Crisis Levels
  • The ratio between Schatz and Bund call option implied volatilities has risen to the the highest level since the euro-area sovereign debt crisis as the front-end remains supported by ECB QE buying, Bloomberg strategist Tanvir Sandhu writes.


  • The monthly average maturity of ECB QE purchases is declining given that the larger stock of bunds available for buying is in the shorter-dated sectors
  • Richening of Schatz spreads is increasingly being driven by ECB rather than just French election hedging
  • Schatz ASW extends widening to 60bp and likely to move beyond record richness of levels of nearly 63bp
  • Any fading of the Le Pen risk premium may result in a partial unwind, but ultimately the underlying driver of the spread remains the ECB

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