A positive correlation has recently emerged between Bund yields and sovereign spreads in the Euro Area. In detail, the higher Bund yields were accompanied by a widening of spreads. As he remembers Florian Späte, Senior Bond Strategist at Generali InvestmentsCorrelation is usually negative (with a long-term average of -0.3) as German bonds tend to outperform when spreads widen and underperform when they tighten. In particular, in times of high stress on the markets it has always been possible to observe a race towards a “safe heaven”, which contributes to lowering the yield on Bunds and increasing spreads. According to Spate, the increase in US yields and the contained purchases of the ECB in the QE plan are responsible for the change of pace. Recent news regarding a possible delay in the disbursement of the Recovery Fund UE put further pressure on European non-core bonds.
But we do not expect that positive correlation to persist the analyst continues. The ECB put its words into practice and increased purchases under the Pandemic Emergency Purchase Program (PEPP). Based on the available data, the ECB is likely to increase its monthly purchases in the QE plan by around € 20 billion in the second quarter. In addition, cash flow will be more favorable as issuing activity slows down. Therefore, the correlation is expected to turn negative again, with higher Bund yields likely to be accompanied by moderately tighter spreads.