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    EUR Rates: Bund yields flirt with the zero ‘floor’- TDS Sandeep Kanihama

    Renuka Fernandez, Senior Rates Strategist at TD Securities, notes that Bund yields have followed the move lower in USTs following the recent weak NFP print, as they have found previously that the first principal component (the level factor) for the UST curve is around 97% correlated with the level of 10y Bunds.Key Quotes “The moves lower on bunds are exacerbated by bund scarcity dynamics— the constraints around the ECB asset purchase program (APP) mean the ECB can only buy bonds yielding above the deposit rate. As such, the move lower in 10y bund yields is amplified by an increased demand for those bonds still eligible for purchase. This negative convexity dynamic results in a self-reinforcing feedback loop whereby yields fall, resulting in a fall in the pool of bonds eligible for ECB purchase, which itself results in higher demand for those bonds that are eligible, resulting in a further fall in yields.The third move pushing Bund yields lower is, in our view, hedging of Brexit risks. Given the factors pressuring bund yields lower, any increased market dovishness on the Fed or indeed any increased uncertainty on the outcome of the EU Referendum, will push yields lower from here.As such, whilst 10y bunds are at all-time lows, we see factors that can push them lower still in the near term. Given this we look to enter into short positions post June 23 when the outcome on the referendum is known and market expectations of fed hikes rise going into the September FOMC meeting (on the assumption of a Remain win).”


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