EU bonds underperform – Danske Bank

It has been a dramatic week in the global bond markets on the back of the German EUR 500bn infrastructure plan as well as more money for the defence spending and the changes to the Debt Brake. Furthermore, EU announced an EUR 800bn defence package. Hence, German and EU bonds underperformed both swaps and US Treasuries significantly, Danske Bank's FX analysts Kristoffer Kjær Lomholt and Filip Andersson report. 

France is at risk of being downgraded to A+ this week

"Looking forward, then the focus will be on Germany, where the plan is expected to be passed this week. We have closed our short position in the Bund ASW-spread as we reached out target even though it could widen even further. Given the dramatic rise in the Bund yield of some 40bp during last week, then we recommend going long 10Y Bunds on an outright basis as we typically see a rebound on the back of such a significant rise."

"The positive rating story on the periphery as Greece was upgraded to A from A- by DBRS, while France is at risk of being downgraded to A+ this week as Fitch have them up for review on Friday and have France on negative outlook. The main event in the EU primary market is the expected syndicated deal from EU. Secondly, we have auctions from Italy and Germany and potentially Portugal."