Irish, German, Spanish and Italian borrowing costs hit 2015 highs on Wednesday as a global sell-off in government bonds, sparked in part by easing deflation fears and investor weariness with ultra-low yields, accelerated.
Ireland’s benchmark ten-year bond yields rose 30 basis points to 1.13 per cent, having hit a record low of 0.6 last month.
Benchmark 10-year Bund yields traded at 0.58 per cent, after hitting a low of 0.05 per cent last month, when many investors expected them to turn negative due to the impact of the European Central Bank’s €1 trillion bond buying programme.
Spanish and Italian bond yields rose and were close to 2 per cent. Market participants are still struggling to fully explain the moves. The sell-off gathered speed last week, coinciding with data showing prices rose faster than expected and the first expansion in euro zone private lending in three years.
Rising oil prices are reviving inflation expectations globally, with yields on UK gilts and US Treasuries also rising sharply. But many analysts say easing deflation fears alone should not have led to such a steep rise in yields. German inflation was still a very low 0.3 per cent in April.
Traders say the move snowballed after the initial sell-off took yields to levels where investors had set automatic stop-loss triggers on bets that bonds would rally further.
Low liquidity in global bond markets after central banks around the world bought up large chunks of government debt also exacerbated the moves. “From a macro perspective the sell-off was long overdue - we’ve seen over the past few months an improvement in euro zone data,” said Jan von Gerich, chief fixed income analyst at Nordea in Helsinki.
“You can always find reasons in such numbers but I wouldn’t say this was the underlying cause... Yields were at such low levels that real money investors simply were not interested anymore.”
At such low yields, many investors in what are usually seen as the world’s safest fixed-income instruments are losing money. The sell-off was mostly felt in longer-dated maturities, which usually reflects an improvement in the economic outlook. German 30-year yields rose 8 basis points to 1.12 per cent, having traded as low as 0.40 per cent three weeks ago.
But a better economic outlook does not really explain the fact that yields on lower-rated bonds are rising at a faster pace than those in Germany. Spain and Italy badly need a pick-up in growth to stabilise their debts and such expectations were to arise, the difference between peripheral and German yields should shrink, analysts say. A sell-off in stock markets also contradicts the theory of a shift in economic fundamentals being behind the bond rout.
"Positioning, rather than news flow is currently the key market driver," Rabobank strategists said in a note. "With thin liquidity exacerbating recent market moves we would expect that the flushing out of these long positions has some way to go meaning the market will likely remain vulnerable to intermittent sell-offs near term." Germany plans to sell two-year bonds later in the day.
Reuters
