German 5s10s (Bobl/Bund) Steepening

Does anyone have any insight into why the belly of the German curve has become so rich?

Please no charting nonsense or EU spiel!!!

 

As I said to the other sandwich makers on the open screaming the same thing - bobl has no business in the periphery tightening/unwind

 

It's partly just the shape of the curve and the pricing of the ECB.

 

Martinghoul

Please could you elaborate a little more. I am unfamiliar with the role of the ECB and its impact on the 5yr and more importantly, the timing of the steepening move.

Many thanks

 

It's just sort of the mechanics of the curve... You have the ECB on hold, but with the mkt expecting cuts in the near future. That means that the curve looks very flat initially, but then prices a very steep "rebound". It's the sort of curve shape that results in a macro environment where the world looks OKIish now, is expected to look a lot worse in the short term (2 - 3 years), but then all is expected to be really well in the longer term. That's how I think of these things, anyways, so take w/ a pinch of salt.

 

Appreciate the response. I think you have a point regarding the longer term pressures on the YC.

I was looking for a more technical explanation relating perhaps to 5 year supply. However, I think I am curve fitting here. Looking for something to explain randomness!!

 

Martinghoul,

how does your 2/5/10 portfolio look like in weightings if this macro environment comes true? Overweight short term/underweight long term in % points?

Thanks in advance

Uncle Bill Gross sees it this way:

More quantitative easing suggested by Fed officials including Vice Chairman Janet Yellen is likely to push the central bank’s objective for inflation to above 2 percent, which will cause investors to demand higher yields on longer-term Treasuries, Gross wrote. Investors should buy “safe haven” maturities of under 10 years and in equity markets focus on dividend-producing stocks, Gross added.

 

Well, to be honest, it does matter a lot whether we're talking about Germany or others. Generally, I guess I'd agree w/ole Bill that you want to own the belly of the curve the most, but timing and where you get into it matters A LOT. 2s5s10s fly in JPY is arnd -40 (5y rich to wings); in EUR it's -13, so I would be long 5y and short both wings, to begin with. You can tweak the wings then depending on whether it's Germany or smth else.