Negative convexity hedging flows will take 10y bund yields negative - TDS

Renuka Fernandez, Senior Rates Strategist at TDS, suggests that while front end rates are pricing in a 15bps deposit rate cut by the ECB in March, persistently wide periphery spreads to Bunds suggests that the longer end may not be expecting a step up in monthly bond purchases under the APP.

Key Quotes

“Given this, the move lower in longer dated yields on the back of the ECB announcement could be sharp, and amplified by the dynamic hedging of negative convexity flows as investors try to hedge the widening duration mismatch between their assets and liabilities.

Consequently, we expect such activity to push Bund yields lower from here, and into negative territory.”