German Bunds Post Longest Losing Streak in 2 ½ Years

(Bloomberg) --

German bonds -- some of the safest assets in the euro area -- are throwing a tantrum.

Bunds, as they’re called in the market, have fallen for seven consecutive days, taking their yield more than 60 basis points higher from a record low of -0.91%. It’s their longest run of losses in two-and-a-half years.

For traders, it is bringing back memories of 2015, when German bonds sold off rapidly following a weak auction. That snapped a rally built on expectations for quantitative easing from the European Central Bank.

In terms of sheer speed, the sell-off is even quicker this time round -- it has seen the biggest five-day jump in yields since 1990.

The ECB is currently seen as being almost out of ammunition to combat another slowdown, yet governments are finally taking up the baton with huge spending pledges. While Germany has very stringent debt-limit rules, those are showing signs of coming loose as the coronavirus disrupts the economy.

“A move in 10-year bund yields back above zero is not sustainable but it is a very real possibility over the next week,” said Richard Kelly, head of global strategy at Toronto-Dominion Bank in London. “We are in the eye of the storm for market pricing in both the liquidity strains and fiscal fears.”

Other factors are at play too. Fund managers are looking to sell assets in a bid to hold cash, which provides more flexibility and also allows them to prepare for potential redemptions by investors. There are also calls for euro-wide bond issuance, which would dampen the allure of bunds. Liquidity too is very poor, exacerbating the sell-off.

“Market participants are selling everything that still has value to build up defenses against outflows or liabilities they are facing,” said Christoph Rieger, head of fixed-rate strategy at Commerzbank AG. “A lot of longs had been built in recent weeks.”

German 10-year yields rose as much as 23 basis points to minus 0.21%, the highest level since January. Those on 30-year bonds rose into positive territory for the first time since February.

Still, the prospect of the whole curve soon emerging from negative territory is an unlikely one for ING Groep NV.

“It is possible only if the ECB confirms they intent on letting markets to their own devices,” said Antoine Bouvet, senior rates strategist at ING. “It is a possibility but honestly given the degree of volatility, I think the probability of them realizing their mistake is growing fast.”

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