German election: Limited impact on SSAs and covered bonds - HSBC

Analysts at HSBC point out that German Federal elections will take place on 24 September but the market is focused on other events, such as the ECB taper decision and they expect limited impact from the elections on SSAs and covered bonds even in a scenario where the SPD wins.

Key Quotes

“Markets likely to be unfazed on election outcome 

The latest polls for the election next Sunday point to a win for Angela Merkel’s party, making a CDU/CSU-led government the most likely scenario. However, even in the event of an SPD-led coalition government, market reaction would be subdued in our view, because attention is focused on other events.”

“An SPD win would imply higher Bund yields, but only briefly 

Bund yields are likely to rise if the CDU/CSU fail to win as markets might get concerned that the new government will depart from the stability path of the current government. However, we expect this initial reaction to normalise quickly as markets will focus on other factors, such as ECB tapering and geopolitical risks.”

“Greater Eurozone integration is positive for SSAs

A CDU/CSU-led government would be neutral to somewhat negative for agency and supranational spreads vs Bunds, depending on the type of coalition. An SPD-led government would be positive and would see spreads tighten.”

“Likely longer run impact on the ESM (European Stability Mechanism)

The outcome of the German election is likely to influence the evolution of the European permanent rescue vehicle. Talks of changing the ESM into a Eurozone equivalent of the IMF have increased recently and have received support from countries, such as Germany. An SPD-led coalition would most likely push for an overhaul of the fund.” 

“Impact on covered bonds less pronounced 

Any yield change of German Pfandbriefe on the election outcome is likely to be limited to low single-digit movements in case of a SPD-led government. If the CDU/CSU win, yield levels of Pfandbriefe should stay broadly unchanged.”