Daily Insight
Group Economics Macro & Financial Markets Research Nick Kounis , Kim Liu & Aline Schuiling
Is the Bund bubble bursting?
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1 May 2015 • • •
Despite the recent jump in Bund yields we maintain our 3m forecast, implying yields will fall back We do expect a significant bounce next year, as ECB QExit expectations build Eurozone inflation no longer negative in April- should rise in coming months
Bund yields have jumped off their lows Over the last few days, 10y Bund yields have risen sharply,
Bund yields have jumped in recent weeks
reversing much of the sharp decline seen since the ECB’s QE
10y, %
programme began. The closing low for Bund yields was on 20
0.6
April, where they ended the session at 0.07%. Since then, they have steadily climbed, especially this week. At time of writing, the 10y yield stood at 0.31%.
0.5 0.4 0.3
Rise may be partly related to early QExit fears
0.2
Bund yields are at extremely low levels given that the economy is recovering and indeed prices look inflated relative to fundamentals. The recent abrupt correction raises the question whether the Bund bubble is bursting. Our view on this is not
0.1 0 Jan-15
Feb-15
Mar-15
Apr-15
yet. The rate rise may be partly related to some fears of an early ECB exit from QE given recent better inflation and money
Source: Bloomberg
supply data (see below). However, it may also have been exaggerated by an increase in supply and illiquid markets.
Eurozone inflation no longer negative The big bad deflationary spiral lasted all of 4 months.
ECB President Draghi likely to dismiss exit worries
Eurozone HICP inflation was flat yoy in April according to the
We think Bund yields will fall on the 3m horizon, and keep our
flash estimate, following -0.1% in March. The period of
forecast of 0.1%. ECB President Draghi will likely continue to
negative inflation has been accompanied by positive economic
dismiss QExit speculation in coming months as underlying
activity data surprises, suggesting we have seen a bout of
inflationary pressures are still weak, while the central bank will
good deflation. Meanwhile, core inflation was also steady at
want to be really sure that the outlook has sustainably
0.6% yoy, leaving it well below the ECB’s goal for overall
improved. Furthermore, we continue to expect that ECB
inflation in the medium term of close to but below 2%.
purchases will lead to acute scarcity of core government bonds. Although the ECB can and will likely expand its eligible
Inflation likely to rise in coming months
universe, this will not be a game changer.
We expect headline inflation to accelerate to well above 1% by year end as the depressing impact of energy prices fades. On
Bund yields to rise significantly in 2016
the other hand, core inflation will remain flat at low levels as it
We do expect a significant change in mood next year as the
continued to be dampened by past weakness in the economy.
recovery becomes more established and underlying
Next year will likely be another story though. Core inflation will
inflationary pressures build. We think that the ECB will end its
start to pick as the effects of the past depreciation of the euro
programme by September 2016, and it will no longer be able to
and the recovery of the economy feed through.
dampen exit speculation. Investors will not want to be standing at the platform when the train leaves. Indeed, we have raised our Bund yield forecasts in 2016, to 1.4% by year end, from 1% previously. A key trigger could be when the ECB extends its forecasting horizon to 2018 at its March 2018 meeting. Those forecasts should signal that ‘the mission is accomplished.’