The Bundesbank’s decision to bring interest on domestic government deposits to 0% revives one of the most debated problems in the European bond market: the scarcity of German government bonds, hence of collateral.
Buba's tweak implies that deposits, once held at the central bank, will flee the facility and look for high-quality higher-yielding securities: short-term German sovereigns. Yet, long-term German yields remain correlated to rising US Treasuries, resulting in a steepening of the German yield curve.
Buba's decision will provide fertile ground for the German yield curve to steepen, proving supportive for Schatz.
Two-year German government yields are currently testing support at 2.95%; if they close below this level and the RSI breaks below 40, they will enter a bearish trend, which could take them to 2.66% or even lower to 2.45%.