Source Reports On Debt Brake Suspension Bias ASWs Back Towards Recent Tights

Yesterday’s BBG source report weighed on ASW spreads from the time it hit to virtually through the close, providing the catalyst to turn the swap spreads back towards recent tights. This came after last week’s German court ruling re: COVID-related spending allowed a base to form in ASW after a run of notable spread tightening.

• A quick reminder that BBG sources suggested that “Germany is exploring a drastic overhaul of its federal budget for this year, including relaxing restrictions on net new debt, following last week’s ruling by the country’s top court.”
• The suspension of the debt brake is seen as a more politically viable situation as it ‘only’ requires a simple majority, which the ruling coalition has, as opposed to the 2/3 majority that a debt brake alteration requires (which would require the support of some of the opposition). Still, that isn’t a given as there are plenty of tensions within the coalition owing to the political makeup/priorities that the different parties hold.
• Commerzbank note that “if the government were to suspend the debt brake again for 2023/24, this could take expected Bund supply back to the pre-GCC planning. To be sure, finding a majority in the government for the suspension will not be easy and the decision will most likely be challenged in Karlsruhe. The budget may then well be ruled unconstitutional, but the money will probably have been spent (and funded) by that time.”
• A RTRS sources piece flagged similar matters to the BBG story re: the suspension of the debt brake, while also highlighting some of the related tension within the ruling coalition.