Long IRISH 10/34 & DSL 7/34 vs. Short Bund 08/34

Following heightened trade tensions, semi-core European Government Bond (EGB) spreads widened vs. Bund during a recent risk-off phase but have since tightened as market sentiment improved due to US policy shifts. Notably, bonds like the 10Y BTP and Bono have returned to near-pre-risk-off levels, while the DSL and Irish bonds have only partially recovered. The underperformance of the Irish curve stems from concerns about potential US-EU trade conflicts, given Ireland’s reliance on US exports and corporate tax revenue. Despite these risks, Ireland is well-positioned with a projected solid cash buffer and a budget surplus, with 2025 GDP growth expected to outperform the Eurozone. Similarly, the DSL curve's weaker performance relative to Bunds relates to cash prices versus swaps, with a forthcoming German fiscal package expected to support the economy and restore term premiums in Bund. In this context, we recommend a PCA-weighted butterfly strategy targeting relative value among Bund , Dutch, and Irish government bonds. We propose being Long IRISH 10 /34 and DSL 7/34 vs. Short Bund 0 8 /34 (entry: 5 8 bp; target 50bp; stop: 6 4 bp; horizon 5m).