Goldman: Stay In Bund Swap Spread Tighteners

Goldman Sachs write “in gross terms, the DFA funding backdrop looks more friendly than in 2023: funding requirement is lower overall, and the tilt towards the 2-5y segment implies that duration at issuance will decline to a quarterly average of €60bn 10y equivalent.”

• “However, combined with the acceleration of ECB QT, we estimate net supply to the private sector will stabilize in positive territory, at about 3-4% of German GDP on aggregate.”
• “Against that backdrop, while we look for limited impact on outright yields, we do think German debt can continue to cheapen against swaps, and with the stock of Bubills poised to decline (by ~€35bn), we think shorts are better located in the 5-10y sector.”
• “Using previous sensitivity estimates, as we project the free-float to increase and see the potential for higher funding costs (via repo), we target another 10bps of tightening in Bund swap spreads, and continue to hold 10y Bund shorts vs OIS.”