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Guest Commentary: Are German Bunds finally heading for the big slide?

Guest Commentary: Are German Bunds finally heading for the big slide?

2012-09-14 17:10:00
George Dorgan, Financial Analyst, and Portfolio Manager, snbchf.com,

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 upwards 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 Again over 1%: 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.

Guest_Commentary_German_Bunds_Finally_Slide_body_Picture_1.png, Guest Commentary: Are German Bunds finally heading for the big slide?

Chart: 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%).

Guest_Commentary_German_Bunds_Finally_Slide_body_Picture_2.png, Guest Commentary: Are German Bunds finally heading for the big slide?Guest_Commentary_German_Bunds_Finally_Slide_body_Picture_3.png, Guest Commentary: Are German Bunds finally heading for the big slide?

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 US at 1.3144.

By: George Dorgan, Financial Analyst & Portfolio Manager, snbchf.com

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