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The 10Y Bund yield now trades equal to the swap, suggesting still strong demand for Bunds since Trump's 'Liberation Day'. Part of this can logically be traced to the uncertainty surrounding US tariffs, but may also be explained by a demand for euro assets from foreign investors. Tactically, we still think the Bund could perform as we brace for more turmoil.
 

The demand for Bunds may be more structural than just sentiment driven

While relatively calm market days like Monday seem to be business-as-usual, the Bund market is suggesting a structural shift away from the world as we knew it before Trump’s tariffs. The 10Y Bund yield is now equal to the swap rate, which is similar to the levels just after Liberation Day. To put this in perspective, just after the German spending announcements, the 10Y Bund traded 17bp above swaps. As such, the demand for Bunds continues to be strong, despite the improvement in other risk indicators such as the VIX and MOVE indices over the past weeks.

The outperformance of the Bund captures the uncertainty around US tariffs, yet may also be a gauge of the “Sell America” theme. With an EU deal looking difficult, investors flock to Bunds to hide from any renewed turmoil. But it’s probably not just domestic investors looking for Bunds. Whilst Bund yields signal a risk-off environment, European equity markets have recovered almost all losses since Liberation Day. The STOXX index is up some 15% since its April lows. When taken together, the strong performance of Bunds, eurozone equities and the euro suggest that foreign investors are interested in buying euro assets in these uncertain times.

One could argue that the German spending story is moving to the background, thereby pushing Bund yields lower, but still-elevated, longer-dated real rates suggest this is not the case. The 5Y5Y implied real rate from euro swaps remains some 30bp higher than before Germany’s spending announcement. And since Liberation Day, this real rate has not nudged lower. Looking at all these dynamics together, we see Bunds as a sound safe haven asset to take a position in for more volatility ahead. Whilst the German spending story could push Bund yields higher later in the year, for now, global risk sentiment is the more important driver.

Real rates still price in significant German spending, but Bunds see strong demand

Source: ING, Macrobond
 

Tuesday's events and market views

Eurozone inflation data will be watched, although in our view the numbers probably won't change the ECB's decision on Thursday to cut rates by 25bp. The core CPI is expected to come down significantly from 2.7% to 2.4%, ever closer to the ECB's target. The unemployment rate for April will also be published, but the consensus doesn't expect this to move away from 6.2%. From the US, we have factory orders and JOLTS job numbers. The latter will be watched as a taster for Friday's US payroll numbers.

In terms of auctions, we first have the UK with £1.25bn of 38y gilts. From Austria, we have 4y green RAGBs and 10y RAGBs totalling €1.44bn. Lastly, Germany will auction €4.5bn of 2y Schatz.

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