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Mizuho Note Short-Term Hawkish Risks On ECB, But Like Belly Of 2s5s10s German Fly Further Out

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Mizuho note that “10-Year German bonds have been underperforming U.S. Tsys. If a hawkish ECB cut materialises today, we think investors will sell the strength in EUR duration given the improvement in the latest EUR macro numbers.”

  • They go on to caution that “the risk scenario is for Lagarde to not sound as hawkish as the market is expecting, driving a further rally in EUR rates.”
  • They go on to highlight “10-Year Bund yields are currently testing a key technical level (2.45-2.50%). A less-hawkish-than-expected ECB is, in our view, one of the key necessary conditions to see Bund yields close the week below that technical threshold.”
  • Over a slightly longer term perspective they think “the YTD selloff in rates is a bit overdone.” They flag a pullback in commodity prices and the bid in U.S. Tsys as supportive factors for EGBs, while indicating “good risk-reward in buying 5s on the 2s5s10s fly.”
  • This comes after 5-Year Bunds recently closed at the cheapest level in over a year on the 2s5s10s fly.

Fig. 1: German 2s5s10s Butterfly (bp)

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Mizuho note that “10-Year German bonds have been underperforming U.S. Tsys. If a hawkish ECB cut materialises today, we think investors will sell the strength in EUR duration given the improvement in the latest EUR macro numbers.”

  • They go on to caution that “the risk scenario is for Lagarde to not sound as hawkish as the market is expecting, driving a further rally in EUR rates.”
  • They go on to highlight “10-Year Bund yields are currently testing a key technical level (2.45-2.50%). A less-hawkish-than-expected ECB is, in our view, one of the key necessary conditions to see Bund yields close the week below that technical threshold.”
  • Over a slightly longer term perspective they think “the YTD selloff in rates is a bit overdone.” They flag a pullback in commodity prices and the bid in U.S. Tsys as supportive factors for EGBs, while indicating “good risk-reward in buying 5s on the 2s5s10s fly.”
  • This comes after 5-Year Bunds recently closed at the cheapest level in over a year on the 2s5s10s fly.

Fig. 1: German 2s5s10s Butterfly (bp)

Keep reading...Show less