News and events

05.22.2024

BUND–RAISING BARS

We remain tactically LONG Bunds and moderately lift our accumulation and take profit levels. While we suggest accumulating further, we raise the bar for further accumulation. Meanwhile, we raise our bar for taking profit.

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We remain tactically LONG and we continue to suggest accumulating gradually, as we continue to expect 75/100bp of rates cuts this year by the ECB (vs. 70bp priced in by markets).
While we suggest accumulating further, we raise the bar for further accumulation to 2.50% (from 2.40% before). Meanwhile, we raise our bar for taking profit at 2.10% (from 2% before). For the following reasons:
 
      A) QT is on an acceleration path, and it is negative for Bunds (and EGBs more broadly)

We expect the acceleration of QT in the coming months  to weigh negatively on Bund (and EGBs more broadly) and reduce room for performance-related gains. For the following reasons: 

  • In 2024, we estimate that the ECB will not reinvest around EUR 270bn of its PSPP and PEPP holdings of government bonds. This will come on top of the regular EA net issuance, which we estimate will amount to around EUR 440bn, resulting in a true net supply of EUR 710bn. 
In 2025, regular net supply might decline by EUR 30-35bn to EUR 405-410bn, but we estimate that the amount of redemptions from PSPP and PEPP will increase to around EUR 380bn (from EUR 270bn this year). Overall, this might result in a true net supply of around EUR 790bn (EUR 80bn more than this year). In other words, in 2023 and 2024 together, traditional investors will have to extend their exposure to EGBs by EUR 1.5tn to finance new borrowing and make up for ECB’s QT (Figure 1). 




Chiara Cremonesi
Senior Rates Strategist
Investment Research


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