More Bad News For German Banks: Bund Curve Pancakes

Following this morning's near terminal posturing by JC Trichet, who almost, but not quite, is about to hike rates any minutes now, we promise, which saw the EUR surging to near 1.40, a far more troubling side effect is the accelerating flattening of the Bund yield curve. As can be seen below, the German 2s10s has dropped from a high of 210 bps in December to 156 bps, a nearly 25% contraction. Luckily, it has another whopping 14 points to take out the September lows, which back then resulted in deplorable European data, indicating how much more sensitive the continent is to the fluctuations in the yield curve. Furthermore, as March is when the calendar festivities in Europe start for real, German banks are rightfully cursing JCT to hell following his failed attempt to secure his ECB legacy as a hawk on the way out. Should the ECB indeed follow through with an April tightening, look for the iTraxx Senior Financials index to start the slow grind wider as risk in European banks come back with a vengeance.


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