Description of today’s Bund trade via KBC Bank

Markets•The start of this week’s trading session marked a stark contrast with last week’s truce. Positive Asian risk sentiment –thank you November PMI’s –and, especially, the outcome of this weekend’s German SPD leadership contest started an intensive selling spree on core bond markets. German Bunds under performed US Treasuries. The party’s left wing contestants (Walter-Borjans & Esken) beat the centrist team of finance minister Scholz and Geywitz.They campaigned on a platform of breaking with the CDUand trying to rebuild in opposition, a sharp rise in spending on infrastructure, tougher climate change laws and a big stimulus package to help the German economy through its current weak patch. The SPD gathers this week in Berlin to contemplate whether or not to remain within the ruling coalition.A decision to leave would most likely result in a temporary minority CDU/CSU government with main legislation passed through Parliament and fresh elections scheduled in 2021. Longer term, the SPD shift implies ahigher likelihood of German fiscal spending, explaining this morning’s reflationary reaction on bond markets.The German yield curve bear steepens with yields adding 1.5 bps (2-yr) to 8.7 bps (30-yr). 10-yr yield spread changes vs Germany are close to unchanged with Italy (+3 bps) under performing and Ireland (-4 bps) outperforming. The US yield curve bear steepens as well with yields rising by 2 bps (5-yr) to 6.4bps (30-yr)despite an unexpectedly declining manufacturing ISM (48.1 vs. 49.2 expected, from 48.3)with key sub series such as employment and new (export)

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