The shape of the German yield curve has seen a rollercoaster ride in the last 12 months. The ECB’s QE programme caused the curve to flatten as the national Central Banks bought their allotted amount of bonds across the curve, with the ECB’s rules excluding the buying of any bonds yielding less than the deposit rate. This “rolling flattening” caused 30yr and 5yr German yields to compress by around 70bps in the first 6 months of 2016. In Q4, though, the ECB decided to tweak their rules by reducing the allocation to long dated bonds while crucially allowing bonds to be bought below the -0.40% deposit rate. Data released last night shows that the Bundesbank has made the most of these changes by shortening the average maturity of its buying from 12 years to almost 4 years! This, along with buying by the SNB amongst others, helped push 2yr yields to -0.95% – a new low – and the curve to its steepest level since 2015.
Is this an opportunity to oppose the move and position for a flattener? I’m not so sure. The Bundesbank buying plans are unlikely to change and with political uncertainty on the rise, the demand for “safe” German bonds i.e 2 and 5yr bonds, can continue. The short end will ultimately be vulnerable to a re-pricing once improved economic data encourages the ECB to taper further but, for now, the momentum and flow of buying favours a steepening bias. The flattener may have to wait on the side-lines for a few months before it gets its turn to ride the rollercoaster.