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Another Sharp Bund Selloff Sends EUR Surging, Futures Sliding

Tyler Durden's picture




 

Just two short weeks ago, the yield on the 10 Year Bund was in the single basis points and flirting with zero, if not negative. Since then, first Gross, then Gundlach realized the very simple math of shorting negative yielding fixed income instruments which we laid out simply here a week ago...

... and since then the Bund has tumbled, with yesterday seeing the sharpest drop and according to Commerzbank, flash crashing, following news that after three years of negative loan growth Europe may be finally renormalizing, a first step to if not the outright end of ECB QE, then certainly a taper.

But while many thought the selloff had peaked yesterday, and would henceforth be more orderly, they were proven wrong, when right out of the gates this morning, investors were very, so to say, bunderweight, on the German benchmark govvie and the yield promptly gapped up as high as 0.38% before retracing some of the sharp move higher.

 

A move which as the following chart shows may be just the beginning if the weekly support is taken out:

As we noted yesterday, the sharp move higher in yields  started yesterday. What caused it, UBS asks, and answers: "Not fundamentals."

Euro bond yields started to rise well before the 13:30 releases of Germany CPI and US GDP. German CPI was fairly close to consensus estimates in any case. Moreover, European bond yields spiked in advance of the equity sell-off and strengthening EURUSD. In our view, the moves today were driven largely by technical factors.

 

 

Positioning

 

Many European investors, especially asset managers and hedge funds, are tactically overweight duration. These overweights have persisted for some time, ahead of the well anticipated sovereign QE programme. We and other observers have argued many times that markets are prone to episodic volatility, as dealers have limited capacity to warehouse risk. The move today fits this thesis.

 

Several consensus positions in European rates are centred around the expectation that sovereign QE will result in a scarcity of bonds leading to a price squeeze. Three positions stand out:

 

• overweight duration in core and peripheral markets,

• long 10yr Germany vs swaps (also captures Greek risks) and

• yield curve flatteners.

 

The magnitude of today's moves suggests that exposures could be quite large.

 

 

The sell-off in Europe almost certainly was exacerbated because it occurred on the day of the FOMC meeting. US market-makers naturally are disinclined to add risk only hours before a Fed announcement, even one that is expected to be tame. Investors also usually refrain from shifting risk exposures on Fed today. Even so, UBS traders reported that investors were net buyers early in the US trading session.

Speaking of positioning, perhaps the biggest drive of the Bund weakness as we enter May is that German net flows turn from sharply negative to modestly positive, suggesting the technical pressure will be far less.

However, in June and later the flows flip again, and German net flows once again become strongly negative.

So what's a bond trader to do?

Perhaps Socgen summarized it best when it said that "this is not what the ECB's QE was supposed to do: euro up, bond yields up, stocks down."  Oops.

It adds that "it worked to a tee between January and mid-April but oil prices and the US economy are starting to spoil the party." and that "without a strong US partner, QE in the eurozone will mean very little without structural reform. The message to EU officials: this time a stronger euro really isn't the ECB's fault."

For now the EURUSD is moving in lockstep with the Bund yield, and moments ago it rose to 1.250, a two-month high, which in turn pushed both European stocks and US equity futures to session lows.

Still, the most notable thing over the past 48 hours is the sheer velocity and pace of the selloff, proving once again just how illiquid the market is, and that when one of the most concentrated positions begins unwinding, the market may very well simply go bidless. Or just shut down entirely.

 

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Thu, 04/30/2015 - 04:48 | 6046102 Haus-Targaryen
Haus-Targaryen's picture

Die €, die you son-of-a-bitch.  Why won't you die?

Thu, 04/30/2015 - 04:48 | 6046103 Headbanger
Headbanger's picture

CRASHHHHHHHHHHH!

Thu, 04/30/2015 - 05:06 | 6046108 Atomizer
Atomizer's picture

Dennis Gartman strikes again  

Thu, 04/30/2015 - 05:41 | 6046122 londoncalling
londoncalling's picture

For now the EURUSD is moving in lockstep with the Bund yield, and moments ago it rose to 1.250, a two-month high, which in turn pushed both European stocks and US equity futures to session lows.

 

1.250 or 1.1250?

Thu, 04/30/2015 - 05:42 | 6046123 londoncalling
londoncalling's picture

i'm long euros from 1.08 so i'd prefer 1.25 but i think maybe not just yet

Thu, 04/30/2015 - 06:03 | 6046131 Traderone
Traderone's picture

I like your contrarian way of thinking (long Eur/usd) , every dick and his mother is short 'coz it's goin' to parity' and they are getting creamed. I wouldn't touch FX with a barge pole myself but admire those who can do it successfully.

Thu, 04/30/2015 - 06:41 | 6046174 londoncalling
londoncalling's picture

thanks trader one, i've read some of your comments and one stuck with me something like

if you don't have a set up you've got no business trading and if you don't have the discipline to wait for the set up you have even less business trading

that says it all!

i don't really do forex but on new years day i always work out annual pivot levels, they usually play a role in forex in the year (last year high in cable and euro was annual s1)

i started buying euros at 1.0832 and below purely for a bounce

for forex that is my set up, annual s1,s2, pp etc

 

Thu, 04/30/2015 - 06:44 | 6046176 londoncalling
londoncalling's picture

as an example look at 1.1467 horizontal line on euro this year, certainly some big fish were using that level to trade

maybe it's voodoo maybe it's coincidence, maybe it just works so you use it!?

Thu, 04/30/2015 - 06:50 | 6046186 londoncalling
londoncalling's picture

looks like the guy who offered me 1.08 is downvoting today :-)

Thu, 04/30/2015 - 06:51 | 6046188 londoncalling
londoncalling's picture

prob the same guy that offered me 1.4976 in cable :-)

Thu, 04/30/2015 - 08:06 | 6046336 Traderone
Traderone's picture

LOL, i seen the red arrow and thought that rather strange but screw 'em ( I evened up the score a little for you), as long as they keep their trading accounts open to us then they can red arrow to their hearts content. Good luck mi amigo.

Thu, 04/30/2015 - 08:51 | 6046442 londoncalling
londoncalling's picture

you too; stay lucky :-)

Thu, 04/30/2015 - 07:06 | 6046211 goldenbuddha454
goldenbuddha454's picture

Wow, Gundlach=money

Thu, 04/30/2015 - 08:19 | 6046361 cigarEngineer
cigarEngineer's picture

Since bonds are not equity, but a series of coupons and a balloon payment, shorting Bunds may not be such a bad idea. Even if they rise, you don't have to cover and can continue making coupon payments to the lender while having positive carry. Your risk now is inflation.

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