巴黎银行-欧洲-宏观策略-债券收益率内在估值模型变为负值-20190328-9页_863kb

G10 Interest Rates: Bund Yield Intrinsic Valuation Model Summary

Core Content

This document discusses the Bund yield intrinsic valuation model developed by BNP Paribas, focusing on the 10-year German government bond yield. The model, which is a simplified version of the Taylor rule, incorporates macroeconomic fundamentals such as eurozone inflation, economic growth, and excess liquidity. It is used to estimate the fair value of the 10y Bund yield and assess whether it is currently overvalued or undervalued.

Main Points

1. Current Fair Value of the 10y Bund Yield

• The model suggests that the fair value of the 10y Bund yield has declined to -0.03% as of March 2019, from 0.02% in February.
• The European Commission's Economic Sentiment Indicator (ESI) for March 2019 showed a slight decline to 105.5, below market expectations, reinforcing the slowdown in economic activity.
• The PMIs (Purchasing Managers' Index) also declined sharply, indicating a further deterioration in economic conditions.

2. Model Predictions and Overshooting

• The Bund is not yet in overshooting territory, meaning it is not excessively priced below the fair value.
• The model defines overshooting as the yield being closer to -0.15%, which is 1 standard deviation away from the mean residual.
• The model's residuals (the difference between actual and fair value) show that the yield has fallen ahead of the model's forecast, suggesting a potential stabilization around current levels.

3. Model Evolution

• The model was introduced in 2015 and updated in 2018 to include the excess liquidity component, which accounts for the impact of unconventional monetary policy, such as quantitative easing (QE).
• Two approaches are used to estimate the fair value:
  • QE extending: A regression based on the start of QE.
  • 3-year rolling: A rolling regression over several years.
• Both approaches yield similar fair value estimates, but with different standard deviations.

4. Model Performance

• The model has strong predictive power since 2018, with R² values of 80% and 70% for the two approaches, respectively.
• Standard deviation of the model's residuals is 10bp for the QE approach and 20bp for the 3-year rolling approach.
• The model has been accurate in predicting yield movements, such as the sharp sell-off in early 2018 and the subsequent correction.

5. End of Year Forecasts

• Based on current trends, the model forecasts that the fair value of the 10y Bund yield could range from 0.05–0.15% by year-end 2019, depending on TLTRO-III take-up.
• If both QE extending and 3-year rolling approaches are averaged, the fair value could be 0.15–0.20%.

Key Information

• Model Inputs:

  • Growth: A leading indicator of economic activity in the eurozone.
  • Inflation: Eurozone headline HICP (Harmonized Index of Consumer Prices).
  • Excess liquidity: The liquidity impact of central bank policies, including QE.

• Market Implications:

  • The model suggests that the Bund is currently undervalued but not in overshooting territory.
  • A yield closer to -0.15% would be considered overvalued.

• Regulatory and Legal Disclaimer:

  • This document is a marketing communication and not independent investment research.
  • It is intended for professional clients and eligible counterparties under MiFID II.
  • The document may contain research content, which is only available to those who have signed up for BNPP's research packages.
  • It is not an offer to sell or issue any financial instruments and does not provide investment, tax, or legal advice.
  • It includes hypothetical and back-tested performance data, which should not be relied upon for future performance.

Conclusion

The Bund yield intrinsic valuation model provides a macroeconomic-based framework to assess the fair value of the 10y German government bond yield. It incorporates leading economic indicators, inflation, and excess liquidity to estimate yield levels. The model has shown strong predictive power since 2018 and continues to be a useful tool for understanding the market dynamics affecting the Bund yield. However, it is important to note that the document serves as non-independent research and is subject to legal and regulatory disclaimers.