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BUNDS
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Bund futures ticked to fresh session highs around the time that Germany’s top court ruled against the German government. The court deemed that the shifting of EUR60bn earmarked to tackle the COVID-19 pandemic into an off-budget fund was a violation of German constitutional law.

  • The move was modest and Bund futures now sit ~15 ticks shy of reaction highs at 131.06. Clustered resistance sits a little beyond todays bests at 131.24/131.33. 10-Year yields bottomed just out ahead of ahead their September low.
  • Ahead of the court decision Commerzbank noted that such an outcome “would throw a spanner into the government's practice of using so-called special assets, which are actually extra-debt outside the regular budget and make up the vast majority of the federal cash need and hence Bund net funding.”
  • They went on to flag that such a ruling “could temporarily halt or even reverse the significant downward pressure on Bund swap spreads. Besides prospects of lower issuance and a more restrictive fiscal stance it would add fuel to the political infighting in the coalition government, potentially even leading to a break-up.”
  • Although they ultimately remain of the view that “beyond the political noise, the fundamental case for ASW-tightening remains compelling. Considering the typically self-reinforcing nature of sharp ASW-moves, the current momentum implies further downside. In addition, risk-adjusted carry remains attractive. In sum, we recommend holding on to tighteners even after our target has been met but tighten stops further.”
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Bund futures ticked to fresh session highs around the time that Germany’s top court ruled against the German government. The court deemed that the shifting of EUR60bn earmarked to tackle the COVID-19 pandemic into an off-budget fund was a violation of German constitutional law.

  • The move was modest and Bund futures now sit ~15 ticks shy of reaction highs at 131.06. Clustered resistance sits a little beyond todays bests at 131.24/131.33. 10-Year yields bottomed just out ahead of ahead their September low.
  • Ahead of the court decision Commerzbank noted that such an outcome “would throw a spanner into the government's practice of using so-called special assets, which are actually extra-debt outside the regular budget and make up the vast majority of the federal cash need and hence Bund net funding.”
  • They went on to flag that such a ruling “could temporarily halt or even reverse the significant downward pressure on Bund swap spreads. Besides prospects of lower issuance and a more restrictive fiscal stance it would add fuel to the political infighting in the coalition government, potentially even leading to a break-up.”
  • Although they ultimately remain of the view that “beyond the political noise, the fundamental case for ASW-tightening remains compelling. Considering the typically self-reinforcing nature of sharp ASW-moves, the current momentum implies further downside. In addition, risk-adjusted carry remains attractive. In sum, we recommend holding on to tighteners even after our target has been met but tighten stops further.”