• THE EU BUDGET NEGOTIATIONS ARE A DECISIVE ELEMENT IN INVESTORS’ ALLOCATION TO PERIPHERAL VS CORE BONDS
• A CONSTANT UNDERLYING LONG BUILD-UP ACROSS ALL BONDS TRANSPIRES AS THE ECB STEPS UP ITS QE PROGRAM
• A NEW PATTERN IS EMERGING IN MAY AS PERIPHERAL BONDS’ LONGS RETURN
• BTPS AUCTIONS HAVE BEEN USED BY INVESTORS TO REBUILD LONG POSITIONS
POSITIONS WERE REDUCED DRASTICALLY IN MARCH
AS VOLATILITY ROSE, POSITIONS WERE CUT ACROSS-THE-BOARD
- • Investors reacted by reducing positions as price volatility jumped, a pattern similar to the 2008 crisis.
- • Over 30% of the outstanding positions were cut in the Bund, 10Y OAT and BTPs, whilst Schatz’ positions were halved.
- • A drastic reduction from the longs led the move, driving the selloff between March 9 to the 20th (see table and charts).
- • The move caused a major shift in positioning taking the Bund, 10Y Oat, and 10Y BTP from a long bias to an overextended short (March 3 to March 20).
- • The change in Bund is particularly sharp as it moves from an overextended long position to an overextended short position (left chart below).
LONGS RETURN TO CORE MARKETS FROM APRIL
PERSISTENT BUYING IN BUND COINCIDES WITH TWO CATALYSTS
- • We measured the change in positions since the April 14 rescue package announced by the EU Finance Ministers. It is from this point on that a persistent return of long positions started for the German bond futures as the news disappointed investors.
- • From April 14 to mid-May, the Schatz has accumulated a 51.6% increase in long positions whilst the Bund and the Bobl added 14.49% and 10.12% longs respectively.
- • As the April ECB meeting concluded, a significant amount of longs increased favoring core markets and the short-end. A large part of the move happened on the same day with longs in 10Y BTP going down by -6% as Bund longs increased by +3%. Schatz long increased by +10%.
NEW PATTERN EMERGING IN MAY
WHILST THE INITIAL EU BUDGET PROPOSAL COINCIDED WITH A SHIFT OUT OF PERIPHERALS INTO CORE MARKETS, THE NEWLY RELAUNCHED EU PACKAGE IS NOW THE CATALYST FOR A RETURN TO BTPS AS LONGS ARE REBUILDING POSITIONS CONSISTENTLY…