Analysts at TD Securities explained that they continue to be biased long 10Y in Bunds but note that high gap risk makes this position difficult to hold outright. Instead we are holding a Bund 2s10s flattener, which since the ECB meeting has tightened 7bps (Trade P&L +$350K).
"We also favour long duration on the 30Y part of the curve. The dramatic drop in yields in Japan suggests that perhaps long liability driven investors have had to reach further out the curve for yield/duration, increasing their holdings of 30Y JGBs as rates declined.
We would argue that the ECB has been more aggressive than the BOJ in that they have taken rates further and faster into negative territory. We would expect a similar dynamic to ensue in EUR rates—of long liability driven investors reaching further out the curve, into the ultra-long end, in a reach for yield and to stem widening asset/liability duration gaps.
Given this we are biased to both long duration positions on the 10Y and 30Y, and favour a Bund 10s30s flattener. Entry 71bps, target 54bps, stop loss 85bps. We halve the exposure of the 2s-10s flattener and book profits of $350k."
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