Investors stung by eurozone bond volatility

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[Weird things are happening with the bond market, not just in Germany, but across Europe (Spanish bonds dropped 20% today), and in the US. It will be interesting to watch to see what happens net and how this gets explained. Though various partial explanations are being offered (e.g., rising oil prices), none are sufficient to account for this degree of volatility in what is usually an extremely stable, not to say boring, market. *RON*]

Elaine Moore, Joe Rennison & Michael Mackenzie, Financial Times, 7 May 2015

European bonds gyrated on Thursday in the worst bout of volatility since the eurozone debt crisis, as markets were thrown into confusion over the impact of quantitative easing on Europe’s financial assets and economies.

In the space of a few hours the yield on Germany’s 10-year Bund, which moves inversely to prices, jumped by 21 basis points to 0.80 per cent before easing back to 0.59 per cent.

With sovereign bond yields rarely moving by more than a few hundredths of a percentage point in a day, the volatility caught investors off guard.

“We’ve been hurt,” said James Athey, investment manager at Aberdeen Asset Management. “The movements of recent days have been extremely unusual and the magnitude doesn’t reflect the economic data we’re seeing.”

Some experts believe the sell-off is simply a correction to the strong rally in bond markets this year. When the European Central Bank launched its QE programme in March, investors piled into eurozone debt, pushing up bond and equity prices and driving the euro sharply lower.

This crowded position left the market vulnerable to small shifts in sentiment.

Oil prices have jumped in recent weeks, alleviating fears about deflation and the downward pressure on bond yields. Nevertheless, many market experts were still puzzled by Thursday’s swings, saying the timing of recent market volatility lacked a clear trigger.

“It is difficult to understand exactly what is driving this,” said Michael Riddell, bond fund manager at M&G Investments. “But that’s in part because central bank action has blunted the relationship between feedback from the economy and prices in markets.”

The scale of the ECB’s €60bn a month bond buying programme led a number of investors to expect the rally in eurozone bonds to continue throughout 2015. Less than three weeks ago, the yield on the 10-year German Bund hit a record low of 0.05 per cent and analysts at Citi speculated that it was on track to hit zero.

“There is a lot of soul searching at the moment because a lot of people thought Bund yields were en route to minus 20bp,” said Ralf Preusser, rates strategist at Bank of America Merrill Lynch.


German government debt is regarded as a benchmark for European assets and the sharp price movements on Thursday ricocheted around markets.

European equities dropped sharply in the morning, before moving back up while US stocks slumped in early trading before stabilising.


In France, benchmark 10-year bond yields rose above 1 per cent for the first time this year, while the market volatility prompted Poland to cancel a planned bond auction.

Analysts were undecided as to how long the current bout of volatility might last. “Liquidity has been very poor and this has exacerbated the price action,” said David Tan, global head of rates at JPMorgan Asset Management. “It is difficult to say when the selling will stop.”

Research by HSBC suggests pressure on bond yields could return in the next few weeks. The fall in bond prices in recent days has coincided with a rise in the net supply of eurozone bonds which is due to fall back in June and July. The resulting squeeze could fuel a further rally in the market, said the bank.

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