Euro-area government bonds are falling out of favour.
Top money managers are turning against securities after yields dropped to unprecedented lows across the region. Emerging signs of inflation are dimming demand. And investors failed to show up in sufficient numbers for Germany’s debt office to meet its sales goal at Wednesday’s auction of five-year notes.
Germany’s 10-year yields rose to the highest level in six weeks as securities slumped across the region after DoubleLine Capital’s Jeffrey Gundlach said he’s considering making an amplified bet against the nation’s bonds. His comments echoed those by Janus Capital’s Bill Gross, who said bunds were the “short of a lifetime.”
Their comments reflect growing angst among investors after the European Central Bank’s 1.1 trillion-euro ($1.2 trillion) quantitative-easing program helped send yields below zero on securities from Germany to Spain. Billionaire hedge fund manager Alan Howard said this week it’s “just crazy” to hold bonds with negative yields.
“These are influential voices that offer a contrarian view when the German bond market appears to be at an extreme level, so there’s definitely going to be an impact on the market,” said Salman Ahmed, a global strategist at Lombard Odier Investments Managers in London.
Supply Pressures
German 10-year bond yields rose 11 basis points, or 0.11 percentage point, to 0.27 percent at 2:15 p.m. London time, and touched 0.28 percent, the highest since March 18. The 0.5 percent bund due in February 2025 fell 1.055, or 10.55 euros per 1,000-euro face amount, to 102.215.
Germany got bids of 3.649 billion euros at the five-year note auction, short of its 4 billion-euro sales goal. It’s the first time an auction of five-year debt missed the target since Jan. 21, and the third bond sale that was technically uncovered this year, according to data compiled by Bloomberg. The nation sold the securities due in 2020 at an average yield of minus 0.07 percent.
Adding to the supply pressure, Italy auctioned 8.25 billion euros of debt on Wednesday, while Portugal began selling 10- and 30-year bonds via banks.
Bonds extended losses amid signs inflation is reviving in the region, reducing the value of fixed payments on bonds.
Growth in euro-area M3 money supply, which policy makers see as a gauge of the underlying strength in economic activity, averaged an annual 4.1 percent in the first quarter, the fastest pace since 2009, according to ECB data published today.
The annualized inflation rate in Germany quickened to 0.3 percent in April from 0.1 percent the previous month, according to European Union-harmonized data published by the Federal Statistics Office in Wiesbaden on Wednesday.
Portugal Drag
Italian 10-year bond yields climbed 12 basis points to 1.50 percent and Portugal's 10-year bond yield jumped 20 basis points to 2.17 percent.
“Portugal issuance is dragging the periphery lower,” said Owen Callan, a fixed-income strategist at Cantor Fitzgerald LP in Dublin. “Germany issuing five-year as well into an already weak market. At the same time as some comments from more and more people about the unsustainability of negative euro-zone rates.”
Gundlach said in a Bloomberg Television interview on Tuesday: “let’s say you leverage up the German two-year 100 times, that’s a 20 percent return,” referring to the potential bet against the securities.
Lombard Odier’s Ahmed disagrees with Gundlach. “It might take a long time for these short positions to work. One can’t rule out the possibility of a Japan scenario for Europe. There could be more than one round of QE,” he said.