No Lack of Conviction for Europe's Bond Bears `Selling the Dip'

(Bloomberg) -- European bond bears aren’t for turning, even after a week that should have been supportive for fixed income.

Sovereign-wealth funds will continue diversifying out of bonds as they search for higher yields, according to PricewaterhouseCoopers LLP, while Investec Asset Management is looking to sell bunds versus Treasuries on any brief rally. As if on cue, German notes forged fresh multi-year lows on Thursday despite weak inflation and a report that the European Central Bank will likely extend its bond-buying program for a short time.

No Lack of Conviction for Europe's Bond Bears `Selling the Dip'

Bond bears have re-emerged on conviction that the market is on a path to higher yields as the end of years of unprecedented monetary stimulus comes into sight amid a strong global economy. With a bund sell-off that began in mid-December resuming after taking a brief respite earlier in the week, investors seem to be looking past any short-term noise and focusing more on the ECB’s end goal of normalizing policy.

“We are yield dip sellers in this environment,” said Investec AM money manager Russell Silberston, who sees the German 10-year yield spread versus Treasuries falling by 50 basis points in the coming months. “There is no doubt the ECB are exiting, and this will keep bunds under pressure.”

German 10-year bond yields rose four basis points to 0.73 percent on Thursday, their highest in more than two years, while those of their five-year peers climbed above zero percent for the first time since 2015 on Monday. The extra premium paid by investors to hold comparable U.S. Treasuries over bunds was at 202 basis points.

The increase in yields has come despite data showing euro-area inflation is still way below the ECB’s target, while oil prices and European stocks have fallen this week, which would normally support bunds. In addition, Bloomberg News reported on Monday that even the most hawkish ECB officials were said to endorse a gradual tapering of asset purchases after the latest extension concludes in September.

No Lack of Conviction for Europe's Bond Bears `Selling the Dip'

For Commerzbank AG, the bearishness shows investor expectations for ECB rate increases outweigh concerns about sluggish inflation. Options pricing suggests traders concur and are positioned for further bund weakness following the recent sell-off.

“Markets have made up their mind that the ECB will hike aggressively even in the absence of euro-area reflation,” said Michael Leister, a strategist at Commerzbank. Events this week have “hardly made a difference for bunds.”

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