German Bunds have prospered from the escalating crisis in the euro-zone. Earlier this week, the 10- year yield briefly hit 2.5% – a new low for the year – before edging up again to 2.7% now. Our base case scenario is that political dithering will reinforce Germany’s status as a safe haven, causing the 10- year yield to drop back to 2.5% by the end of this year and to fall to 2.25% in 2012. But it now seems a possibility that the end game for the euro-zone may occur sooner than we had thought. If so, we can envisage two potential outcomes which would be much less favourable for Bunds.
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