Looking At The Impact Of The Cessation Of German I/L Supply

The cheapening move in conventional bonds has helped German I/L paper off yesterday’s best levels in outright terms, although more than half of the 10-Year breakeven widening on the Wednesday news flagging the cessation of fresh German I/L supply from ’24 holds.

• 10-Year German breakevens sit ~12bp above Wednesday’s close, a little below 2.25%. The measure topped out at ~2.30% on Thursday morning, failing to challenge the late October peak.
• Longer dated breakevens have bettered their own Thursday high today.
• Related costs derived from the re-emergence of inflation in recent years is the perceived driver of the cessation of German I/L supply, which we flagged shortly after the decision was circulated.
• Other Eurozone breakevens also rose yesterday, with spill over magnified by related re-allocation perceptions, although the squeeze seen in German I/L paper was the most notable.
• UBS do not expect "a meaningful shift in funding policy from other major inflation-linked issuers. Such an abrupt end to the German linker programme is a surprise, but the DFA was widely perceived as having been a reluctant adopter of inflation-linked.”
• UBS conclude with “a steady, cautious and incremental approach is more likely from other European inflation issuers. That has been the approach of the US Treasury, which intends to maintain the TIPS share of total issuance at a stable level. Others in Europe appear to have taken a similar approach… Over time, there may still be inflation risk premium to capture.”
• J.P.Morgan suggest that "reduced liquidity could see modest further narrowing of German IOTA, but we expect these to trade within a narrow range around 0bp with limited widening potential."