Can Someone Please Explain This Schatz?

Earlier this morning, I noted that the March (get it?) higher in US 2Y yields looks pretty amusing if you plot it against near record low German 2Y yields.

Indeed, as noted here on numerous occasions, there’s a push-pull dynamic between the US and Germany when it comes to global rates. Have a look:

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(Goldman)

Of course Schatz yields have blown out since hitting record lows late last week. Indeed, between hawkish Fed commentary, what counts as “upbeat” Trump messaging, and, importantly, rising inflation in Germany…

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(Deutsche Bank)

…German 2Y yields have bounced sharply and now sit at their “highest” (and I use that term very loosely) levels in a week:

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“Bund futures slide from the open after hawkish comments from Fed’s Dudley weighed heavily on Treasuries and as the month-end bid fades, German inflation data improves and stocks rally sharply,” Bloomberg writes, summarizing the action, adding that “core curves are bear steepening, with 5s30s steeper by 2-4bps [while] the front-end of the German curve sells off, with continued liquidations of longs seen in Schatz.”

In turn, swap spreads across the 2-5y sector are building on recent tightening, dropping by 4-6bps.

There’s been quite a bit of discussion about what exactly it is driving the insatiable (until today) Schatz bid and in a new note, Goldman argues that richening in the German front end “appears to originate from the ECB’s ongoing QE.”

This isn’t an esoteric discussion. We need to know the extent to which the Schatz spread to 2Y French govies is an indication of investors trying to price redenomination risk around a prospective Marine Le Pen win. That is, we need to understand how closely we should be watching the German curve as a barometer of political risk. If this is all technical buying tied to the mechanics of PSPP (including buying below the depo rate), then it decreases German 2’s usefulness as a litmus test for political uncertainty.

With all of that in mind, consider the following from Goldman.

Via Goldman

Goldman’s conclusion: “All told, the forces behind the sharp rally in the Schatz since the start of this year are hard to dis-entangle.”

Or, visually…