Deutsche Bank Bails Out of Its Call to Short Bunds

(Bloomberg) -- Deutsche Bank AG, Germany’s largest lender, has ditched a call for investors to short the nation’s benchmark bonds after they rallied to send yields below zero for the first time since 2016.

The bank, which earlier this month recommended that investors bet on rising bund yields, said it will re-evaluate its outlook for euro-area bonds after weak German manufacturing data boosted global debt markets. Brexit is also likely to continue weighing on yields until a resolution is found, Deutsche said.

“Increased geopolitical risk and weak headline PMIs have weighed against our bearish rationale and led us to stop out of our short bund trade,” wrote strategists led by Francis Yared. “The combination of increased geopolitical risks and the German PMI miss has led to further pricing of a Japanification outcome across the euro curve.”

Shorting bunds has consistently been a punishing trade for investors who attempted it, with yields dropping almost continuously since Bloomberg records began in 1990. Growing fears of an economic slowdown abound in markets with the U.S. yield curve inverting for the first time since the financial crisis -- a widely touted signal of an impending recession.

The previous Deutsche forecast saw German 10-year yields rising to 0.4 percent by year-end, versus a level of minus 0.01 percent on Monday. Other banks, including Goldman Sachs Group Inc., Commerzbank AG and NatWest Markets, expect German bonds will extend their rally should regional economic data continue to disappoint and stoke fears of a recession.

Deutsche, which is in merger talks with Commerzbank, cautioned last month that the market environment is weaker than it had anticipated.

To contact the reporter on this story: John Ainger in London at jainger@bloomberg.net

To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Neil Chatterjee

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