###POV. Bund 5-10Y curve is back to.....>

BUNDS/CURVE: ###POV. Bund 5-10Y curve is back to 68bp yet again. What drove this

flattening?

- This year, the German 5-10Y curve spread has constantly toyed with the 68bp

level and is has returned to this level in the past few days. What is the

driving force to this spread?

- To some extent, the flattening of the US curve and the drop in the US

equivalent of 27bp is at extremes and may fail to put further flattening

pressure on Germany. Getting a 5-10Y UST inversion is extremely difficult, just

3 occasions since 1980 and very unlikely with a slow-moving Fed and low Fed

rates.

- We can isolate other reasons: low implied vols, tight Bund-BTP and other

credit spreads limiting the ability to pick up yields without duration

extension. Or, low yields driven by term premia compression from QE buying.

- Lethargic central bank activity, rather than impending recession risks sits

behind explanations of flat 5-10Y curves. Once Fed, ECB or BoJ significantly

shifts managing the economy with rates rather QE, then 5-10Y Germany steepens.