The ongoing scramble for German safety away from French political uncertainty, has led to yet another blow out day for German 2 Year Schatz, with the yield tumbling to a fresh all time low of -0.92%, as Eurozone breakup concerns have spread from the bond market, and are now pressuring the euro sending the EURUSD below 1.05 for the first time in over a month.
The rush into German paper and out of France, means that the 10Y Greman-French spread has topped 0.8%, the widest in over four years, while the 2Y US-German spread is now well over 2%, the widest since at least 2000.
This pic.twitter.com/63a2mMUtGC
— Jonathan Ferro (@FerroTV) February 22, 2017
Granted, there was a brief moment of respite moments ago, when France 10Y Bonds briefly rallied after the latest OpinionWay poll found momentum for Le Pen stalling, sending French 10y bonds higher, and the yield lower as much as 5bps before paring loss to 2bps, although that burst of optimism appears to have quickly faded.
Adding to the German bid are signals that the ECB is buying German bonds, in particular those with a yield below the -0.4% deposit rate. With investors holding off selling their short-end German debt as they are used as collateral to receive cash at the ECB, fears have reignited of a collateral squeeze similar to late in 2016 which Draghi attempted, and failed, to address in the December ECB meeting.
Ironically, the rush into 2 Year paper took place even as Germany suffered another technically “failed” 30Y auction, in which the Bundesbank was forced to retain 41.8% of the auction as only €733 million bids were tendered for €1 billion in the offered 30Y paper at a yield of 1.04%.
The decline in the 2-Yr yield has been much more pronounced (falling 13bps from Friday) since Le Pen’s significant narrowing in the Presidential poll seen at the back-end of last week (now over 40%). The political uncertainty regarding the French Presidential election has filtered into FX markets, weighing on EUR, which is now hovering at 6-week lows having made a break below 1.0520, however the downside has been curbed at 1.0500 led by the upside in EUR/GBP.
