Dresdner Kleinwort Wasserstein has started selling structured notes that reference German Bund/swap spreads to investors who believe the European economic recovery is just around the corner. A typical note pays a fixed coupon for the first two years and then switches to leveraged exposure to the Bund/swap spread, according to Achim Beck, managing director and head of derivatives marketing for Germany and Austria.
The Bund/swap spread is the spread between German government bonds and the euro interest-rate swap curve. In an economic recovery banks will issue debt to finance corporate borrowing and the government will get more money through taxation so will not have to issue as much debt, explained Beck. Supply and demand ensures that the spread between the two markets will widen.