Group Economics
Macro Weekly Will the bond rout continue?
Nick Kounis +31 20 343 5616
18 May 2015 A number of big macro themes continued to be in focus last week. The sharp sell-off in the government bond market, the risk of a Greek exit from the eurozone, the chance of a UK exit from the EU, better eurozone growth data and ongoing disappointments out of the US economy. We look at each of these issues in turn and assess the outlook and implications. Will the bond rout continue? No – at least not in the next few months. It is true that
German bond supply to turn negative again
government bond yields, especially in the core of the eurozone, are still far away from fundamentals. However, this reflects QE and it seems to us that ECB asset purchases are set to continue in the coming months. Indeed, ECB President
Net supply minus ECB purchases
10 0
Mario Draghi made this clear in a speech last week. He said that the ECB would implement the QE programme ‘in full’
-10
meaning at least until September 2016. In addition he judged
-20
that ‘quite some time is needed before we can declare
sustained basis’. We think Mr Draghi will stick to this message
Dec
Nov
Oct
Sep
Aug
Jul
Jun
May
Apr
Mar
Feb
long as needed for its objective to be fully achieved on a truly
-30
Jan
success, and our monetary policy stimulus will stay in place as
Net adjusted flow
at the press conference following the June Governing Council meeting.
Source: ABN AMRO Group Economics
The continuation of QE should see core bond yields falling
Is Greece any closer to a deal?
back over the next few months. Against the background of
Only slightly. Following the meeting of eurozone finance
weak supply and aggressive ECB purchases, we think that we
ministers, the statement had a somewhat more positive tone.
will see a scarcity of AAA government bonds that will keep
The Eurogroup “ welcomed the progress that has been
bond prices inflated compared to fundamentals. Indeed, one of
achieved so far”, while acknowledging that “the reorganization
the reasons yields have risen over the last few weeks is that
and streamlining of working procedures has made an
there has been some new supply by eurozone governments
acceleration possible, and has contributed to a more
over this period as they front-load their funding before the
substantial discussion”. However, “ more time and effort are
Summer. However, this will dry up going further forward, while
needed to bridge the gaps on the remaining open issues” .
ECB buys will continue.
Eurogroup head Dijsselbloem added that the negotiations were “more efficient, more positive, more constructive”, while “faster
Overall, we think that the bond market sell-off does not
progress” was being made.
represent the start of the big bond market correction but rather a false start. Having said that an eventual large adjustment is just a matter of time. We think that this will take place early next year when the end of QE or the QExit really comes into view. It seems unlikely to us that the ECB will continue QE beyond September of next year, and tapering could even come earlier in that year as growth and inflation rise.
Our base case remains that Greece and the EU will reach an agreement, probably at the last possible moment. The Greek government appears to be running out of cash. According to finance minister Varoufakis the liquidity issue had become “terribly urgent”, referring to a time period of “the next couple of weeks”. The official deadline of the current bailout extension is
Given these views and recent market developments, we have
the end of June, but we have serious doubts about whether the
raised our German 10y government bond yield forecast for this
country could wait that long for financial aid. Several payments
year by 20bp (to 0.3% at 3-months and 0.5% at year end). But
to the IMF are due in June (total around EUR 1.5bn). So we
we stick to our forecasts for 2016 (1.4% by year end).
think around the end of this month the pressure to reach an agreement will really become acute.