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Are German Bunds finally heading for the big slide ?

Citibank judges that the Swiss National Bank (SNB) does not need a peg anymore. The EUR/CHF exchange rate would be now over 1.20 even if exposed to the free market.

Yesterday we showed that the upward move in the EUR/CHF is just the behavior of some euphoric Forex traders. In the meantime we see a completely different pictures, as for bond yields:

German Bunds – Swiss Eidgenossen Spread over 1% again:  Long-term investors piling back into Swiss franc

 

 Paulsen bet already in March that Germany is willing to pay all remainders of the debt-financed 2002-2007 consumption run in the struggling European nations, even if Merkel insisted on the contrary for months. Many more hedge funds have joined Paulsen and are betting on rising German Bund yields. PIMCO has removed German Bunds from their recommended investments.

Some hedge funds even expect the euro crisis to last another 20 years (as we agree in an earlier post). This would give German finances a hard life. Therefore more than half of the hedge funds expected Bund “yields to double within a year”. Most recently Vontobel warned clients not to put too much emphasis on German Bunds that investors perceive still as “safe.”

Due to the guarantees to the ESM, the EFSF and the costs of Commerzbank bad bank, a think tank expects German debt to increase from 81% of GDP to 83% this year. This despite the low borrowing costs. It is the second institute that reduced the German growth expectations for 2013 from 2.2% to 0.8%. The result: An even higher GDP to debt ratio.

 

German BOBL Future Sept 14

German BOBL Future between April and September 2012

The first consequence of the Bund sell-off is that the yield spread between 10 yr. Eidgenossen and the German Bunds jumps over 1% again. A clear sign that some long-term investors are moving out of German Bunds not only into peripheral bonds, but also into Swiss Eidgenossen. Still at the end of July the spread was only 0.80%, at the beginning of June 0.65%. German investors fear inflation and debt (more details here).

The  German BOBL Future (5 years) is falling to levels not seen since April.

Currently the Swiss 10 years Eidgenossen is trading at 0.66%. On August 30th before the recent CHF depreciation it was at 0.50% and on June 1 at 0.52%. The 10 yr. German Bund stands at 1.71% (on August 30th at 1.56%, on June 1 at 1.17%).

 

German Bund10 yrs Sept14

German Bund 10 yrs Sept14 (Bloomberg)

Swiss 10 yrs. Sept 14

Swiss 10 yrs. Sept 14 (Bloomberg)

 

 

 

 

 

 

 

 

 

The Swiss franc has lost only little 0.18% against the euro and stands at 1.2168, whereas the euro gained 1.19% against the USD at 1.3144.


George Dorgan, snbchf.com

Disclaimer: The opinions expressed above are not intended to be taken as investment advice. It is to be taken as opinion only and we encourage you to complete your own due diligence when making an investment decision. Even if we often write about Forex trading, our advices aren't written for day traders who follow technical channels, but rather for mid- and long-term investors. Our aim is to show discrepancies between fundamental data and current asset valuations, which can lead in mid-term to an inversion to technical channels.
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Permanent link to this article: http://snbchf.com/2012/09/german-bunds-big-slide/

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2 comments

  1. StacyRichman

    Mr. Dorgan,

    I read your comments on Eur/Chf,

    I’ve recently graduated from Dartmouth College in the states and just completed a graduate degree at Columbia Univ., also in the states.

    I’ve followed Fx with great interest since in secondary school.

    Fundamentally, and technically – in my opinion – Central Banks have recently distorted much of what we understand to be a currency – and it’s almost priced by sentiment.

    While currently, the Euro has appreciated greatly, one would expect it to pullback somewhat. However, the complexity here is that precious metal – gold – a decent indicator of price (for me) – would prove the Euro to be sustained at a high level (based on sentiment). Not a logical conclusion – but of a market one.

    Would you comment.

    Many thanks for your time.

    Stacy

    1. George Dorgan

      gold is traditionally correlated more to CHF than EUR, safe-haven flows go into Switzerland and gold. You will find it a several times on our site.
      Please read this in order to get a complete picture on FX theory applied to the Swiss franc.

      The main principle on long-term FX is that a currency can always appreciate, there is no limit, just a too quick appreciation is not desired. This is completely different for stocks, that must follow a long-term average, e.g. Shiller P/E.

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