The news flow out of Greece should continue to calm down nerves, thus dampening the safe-haven demand for Bunds in the short-term. Given the risk of Friday to turn out as a bull-trap, we see downside risks for the Bund future prevailing over the course of the week.
We expect the curve to bear-flatten up to 10y maturities. With ECB President Trichet set to use the ‘strong vigilance’ wording the market will need to re-evaluate the ECB monetary tightening outlook beyond July, too. We view current rate hike expectations at the short end of the curve as too complacent, look for the market to price in more tightening and thus reiterate our call to scale into 2-5y flatteners via Bunds or payers.
Tier-2 – core spreads should have some room to the downside initially. However, in our view it is too early yet for aggressive spread tighteners with record weekly Eurozone government bond supply hitting the market next week.
Commerzbank Corporates & Markets
Interest Rate Strategy