Marketing Communication
Euro Rates Weekly
Bund blowout halted
Group Economics Macro & Financial Markets Research Kim Liu +31 20 343 4669 kim.liu@nl.abnamro.com
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08 May 2015
After the selloff, the rates market is licking its wounds and trying to get its footing back Market sentiment has changed but we still think that speculation on an QE exit is premature The violent market correction suggests that eurozone QE has become a textbook QE case We see room for a bounce back in the short term and see value in 2s5s of core bond markets We expect that volatility and lower liquidity will continue to rock the market
And the supply monitor: Net supply will again be positive. This could weigh on the market. Core supply is focused in 10y. Selloff halted in eurozone government bond market
Market sentiment has changed
For eight days in a row, yields of 10y Bunds surged. Only
As we discussed in our previous Euro Rates Weekly – Start of
today, the blowout halted as yields somewhat declined.
the big short (see here for full publication), it’s very difficult to
However the damage has been done. Bloomberg reports that
give one convincing reason which justifies the spike in yields.
this was the longest losing streak since 2000. As if this is not
Yes, we knew all along that QE was heavily distorting the bond
significant enough, the surge in yields has been relentless and
market. Yes, we were all aware that the value of 10y Bunds
violent. Only a mere three weeks ago the yield of 10y Bunds
was stretched at single digits basis points. Yes, economic data
reached an intraday low of 5bps. At the time, speculation arose
and inflation expectations are on the rise. Yes we knew that
when and not if 10y Bund yields would move into negative
the Bund bubble would eventually burst. But didn’t we all say
territory. Since then the opposite has happened. The yield on
that technical factors would trumpet improving economic
10y Bunds slowly climbed to 16bps and then in a matter of
conditions, at least in the short term? And do we really have
days jumped vigorously in one straight line. On top of this,
proof that QE is effectively raising inflation expectations to a
volatility soared as 10y Bunds moved with 20bps on a single
sustained level? It therefore surprised us that the market is
day. As a result, the 10y Bund yield is currently trading higher
already speculating about an QE exit. Especially as QE is a
than when QE was announced in January of this year.
marathon and we just started this race.
Surge of 10y Bund yields is halted
QE in Europe turns into textbook case?
10y, %
At the beginning of the year, we forecasted that the yield on
1
10y Bunds would reach a low of 10bps. With the benefit of hindsight we can say we were just about right, but only partly.
0.8
We got it partly right because we also thought that yields would stay low for the remainder of the year. To build our case we
0.6
compared the ECB QE programme with known examples of 0.4
QE in the rest of the world. Recent movements have been compared with QE in Japan, where yields grinded lower and
0.2
suddenly spiked. Volatility soared as well, probably reinforced
0 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15
by a thin market. We also looked at the US situation. In the US we described the relation between QE and 10y Treasury yields as buy the rumour, sell the fact. Yields grinded lower in
Source: Bloomberg
anticipation of QE but on announcement yields rose (see
Insights.abnamro.nl/en
Bloomberg: ABNM