LIVE MARKETS-What's needed to push the 10-year Bund above 3%

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WHAT'S NEEDED TO PUSH THE 10-YEAR BUND ABOVE 3%

The 10-year benchmark German Bund DE10YT=RR yield sits at 2.888% on Wednesday, as talks for the country to unleash a massive increase in state borrowing continue to plod along after earlier climbing as high as 2.938%.

Adam Kurpiel, global head of rates strategy at Societe Generale, said the firm now has a term premium target of up to 130 basis points (bps) which would send the 10-year Bund up to the 3% area, but not much further.

According to Kurpiel, there are several factors that could push the yield above 3%. The first of which is time, so "except if the market starts pricing in more ECB rate cuts, or we experience a negative growth shock, the Bund 10y will eventually break above 3%."

Kurpiel notes that at this time, it is difficult to have a precise estimate of the additional net issuance of Bunds this year, although he believe it will not be much, and the following years. However, he said that it will likely not decline, and that the quantitative tightening portion will remain significant.

Should the net volume of Bunds by non-Eurosystem investors remains close to the 170 billion or so euro expected for this year, Kurpiel said the term premium should come back to its pre-Lehman average above 200 bps before the next two years.

Another factor, which would have a faster effect, would be a hawkish repricing of the ECB, said Kurpiel. For the Bund yield to top 3%, "we require ECB rates expectations for the next two years to move above 2.50%," which he believes is "clearly possible" this year as a German fiscal stimulus boosts European growth.

However, he notes that much will depend on the implementation of the German reflationary fiscal package, developments on the global macro front such as tariffs and Fed policy, and the new geopolitical equilibrium in Europe.

Long-term inflation and growth justify a Bund 10-year above 3%, said Kurpiel, as the two-year ahead ECB rates and balance sheet expectations explain the debt's changes from its nominal growth fair value, and should the current rates expectations remains unchanged, "realizing forwards at the front end and the ECB's balance sheet normalization may drive" the yield to 3.25% by the end of 2025.

(Chuck Mikolajczak)

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