(Bloomberg) -- The two-month rally in euro-area sovereign bonds shows no sign of abating.
Government debt supply next month is set to be dwarfed by the more-than 100 billion euros ($123 billion) of bonds to be repaid, Bloomberg calculations show. Aside from the potential support from redemptions, German securities will benefit amid reinvestments from the European Central Bank’s public sector purchase program, according to Morgan Stanley. BNP Paribas SA says that it is too early to bet against the rally in bunds.
“The positive supply-and-demand seasonality in the coming months is increasingly being telegraphed and reflected by the price action in the bund market,” Morgan Stanley strategist Elaine Lin wrote in a note to clients. “This will feed into the PSPP reinvestment as we estimate the majority of the reinvestment flow will go into Germany, which will provide a support for duration.” The bank forecasts net supply in April will be negative 39 billion euros.
European bonds have rallied amid a confluence of factors, including a selloff in stocks, the prospect of a global trade war and signs of a slowing euro-area economy. The ECB is yet to announce an end date for its quantitative easing, or give guidance on the timing of the first deposit rate increase since 2011. Money markets have pushed back expectations for a rate hike to mid-2019, from March just two weeks ago.
German 10-year yields have fallen almost 30 basis points from a more-than two-year high reached in January. Those on their counterparts in France and Spain have also dropped.
The surge in bunds has come even as some prominent commentators heralded the start of a bear market in global bonds. Still, the recent gains are no reason to sell the rally just yet, according to BNP.
“Higher ECB QE reinvestments are still weighing on bund yields,” Laurence Mutkin, global head of Group-of-10 rates strategy, wrote in a note to clients. “There are still plenty of near-term downside risks to yields: it’s too early to try to fade this bond rally.”
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