2017-02-17 11am EDT  |  #bonds #Germany #bunds

One of my favourite long term trades is to be long US fixed income against Germany. There is so much optimism surrounding Trump’s ability to propel the American economy higher contrasted to the abject pessimism regarding European economic prospects. When you add the fact the Federal Reserve is busy tightening policy while the ECB is running pedal-to-the-metal easy, it seems clear the next surprise will be from a relative outperformance from the European economy.

Now don’t misconstrue my message. In the coming quarters the US will most likely grow faster than Europe - but that’s all baked in. I only expect the US economy to not grow as quickly versus Europe relative to expectations.

Real rates in Europe (and Germany in particular) have plunged to levels that correspond to a tremendous amount of monetary stimulus.

These levels are approaching the insane negative real rates seen in the US in the aftermath of the 2008 credit crisis.

Late last year the nominal spread between the German and US 10 year yield pushed down to all time record lows.

As we ushered in 2017, the spread bounced hard from -2.35% to -2.00%. However over the past couple of weeks, it has drifted back down the important support level of -2.12%.

I am already long US t-note futures against short bunds, but yesterday I added to the position. The bad news out of France is giving German bunds a persistent bid. Although it seems scary, the rally in bunds is offering an opportunity to put the US/German spread on at an attractive level. I am not a huge technician, but it seems a great risk reward from this price.

Thanks for reading,
Kevin Muir
the MacroTourist

PS: It is Family Day in Canada on Monday, so the ‘Tourist will be taking the day off. See you Tuesday.