Tracing The Driver For The Bid In Bunds

Why the bid in Bunds? We aren’t 100% sure given the lack of headline catalysts. There was seemingly an element of catch up to the post-EGB cash close bid in the shorter end of the U.S. Tsy curve (with bull steepening seen on the Bund curve), but it seems more than that given that the move in German FI triggered some fresh richening in U.S. Tsys (after the old Bund futures open).

• ECB-dated OIS is loosely in line with prevailing levels seen at yesterday’s EGB cash close (terminal deposit rate pricing continues to hover in the 3.70% region, despite yesterday’s hawkish sources piece from BBG), so that isn’t impacting Bunds.
• Still, there could be some delayed reaction to Villeroy’s comments, made late yesterday, as he pointed to a “marginal” distance left to cover when it came to rate hikes (he has previously stressed that the bulk of the tightening cycle is in the rear-view), while Nagel remained at the hawkish end of the spectrum in comments presented this morning, stressing that no options are off the table re: the Bank’s September meeting, highlighting sticky inflation and reiterating that there is more work to do.
• A break in yesterday’s highs across the major German FI benchmarks would have also provided a flow-based aspect to the move. Meanwhile, cross-market flows observed in the FX & equity spaces at the time would have also helped.
• The move is back from extremes, seemingly aided by a ~9.2K block in Bund futures and a move higher in equities around the EU cash open.