How Bunds and BTp intercept US outflows

The blizzard that has hit US-based assets, the revival of the Bund's role as a 'safe haven asset', and also that stability so appreciated by the market that has allowed BTp bonds to navigate the waters troubled by risk aversion without consequence and indeed to outperform the rest of Europe since the beginning of the year. The return of banks' interest in European government bonds coincides with a favourable period, which analysts believe has a good chance of being confirmed in the months to come.

It was a substantially different situation from the one that emerged in March, when the announcement of Germany's maxi-investment plan had sent German yields into orbit and, consequently, Italian yields to nearly 4% on the ten-year maturity. The subsequent coup d'état linked to the duties threatened on 'Liberation Day' added further pressure to Italian bonds, widening their spread against the Bund from 110 to 130 basis points, but paradoxically also ended up changing the market's orientation.

It is in fact from that moment, and all the more so after the partial backtrack with which Donald Trump announced a 90-day tariff freeze, that European sovereign rates have reversed course, returning in recent days to the levels prior to Berlin's fiscal turnaround. To dispel (at least for the time being) the doubts immediately raised on the potential sustainability of German public debt a series of concomitant causes, which are intertwined first and foremost with events across the Atlantic.

The crisis of mistrust that has hit the financial assets of the United States - Wall Street, the dollar and Treasuries - has in fact resulted in a shift of money flows towards Europe and in particular towards those Bunds that have precisely regained their former role as 'safe haven' during the storm caused by the trade war. This is also why German bonds are now travelling at 2.47%, again substantially in line with the ECB rate and above all with the values of the Irs, the swap rates and free risk instruments by convention.

The possible more expansive stance of the ECB, which could reduce rates to cope with the tariff-induced slowdown in the economy, provided further impetus in this direction, especially on bonds with shorter maturities and sensitive to monetary policy moves. It has also undoubtedly helped to shorten the spreads of peripheral countries and thus bring their sovereign bond spreads back to their starting levels.