The recent sell-off in European rates was not primarily caused by fiscal concerns. Instead, a key driver was the unusual failure of the money market curve to 'bear flatten' as expected during a front-end repricing. This atypical steepening, combined with energy prices and positioning washouts, pushed intermediate yields higher.
The sell-off in 30-year German yields has increased the probability of the Buxel futures' 'Cheapest to Deliver' (CTD) bond switching. This is not a trivial event; such a switch would alter the future's price sensitivity (delta) by approximately 35%, posing a significant and potentially unmanaged risk for investors who are not dynamically hedging their positions.
Despite UK 10-year gilt yields approaching multi-year highs near an upcoming budget, this is not a sign of rising idiosyncratic fiscal risk. The move is primarily attributed to global factors, energy prices, and broad central bank repricing. Indicators like the 2s-10s gilt curve are moving in line with other developed markets, not pricing in UK-specific fiscal concerns.
Recent widening in intra-EMU spreads is not a buying opportunity. The current carry is insufficient to compensate for potential widening risks, exacerbated by investor positioning that remains crowded on the overweight side. This technical factor, combined with rate volatility and geopolitical uncertainty, suggests the market is not yet clean for carry trades.