The predictable seasonal widening of German swap spreads in June-July may not be a straightforward trade this year. The market is well-aware of this pattern, leading to pre-emptive profit-taking. Analysts advise against rushing into "widener" trades, suggesting patience until spreads potentially tighten further first.
Despite significant UK political news, including a potential Labour leadership challenge, the UK gilt market has shown minimal reaction. Gilt yields are primarily driven by global factors like energy prices and moves in German Bunds and US Treasuries, indicating that political risk is currently a low priority for investors.
Despite a recent sell-off, German Bunds are seen as attractively valued compared to US Treasuries. The US-Germany spread is considered too tight, with US yields approximately 7 basis points too expensive versus their Euro counterparts, presenting a cross-market opportunity for fixed income investors to favor German debt.
The European Central Bank's rate-hiking cycle is unlikely to be as long as markets expect. Unlike in 2022, the ECB isn't starting from deeply negative rates, reducing the need for an aggressive "catch-up" cycle. Risks are skewed towards fewer hikes than the 70-75 basis points currently priced by the market.