As first Bill Gross [7]and then Jeff Gundlach [8] suggest shorting German bonds, so it appears the message has sunk in that at 4.9bps 10 days ago, 10Y Bund yields were the short of a lifetime. Since then they have soared, with a dramatic doubling today from 14bps to over 29bps - the highest yield in 7 weeks. As Commerzbank warns, "a cascade of small events is creating a large splash in a structurally ever-thinner market," which has led to a plunge "similar to US Treasury flash crash of Oct. 15."
Yields are crashing higher...Doubled in a day!
[9]
And prices therefore lower...
[10]
As Commerzbank's Christoph Rieger, head of fixed-rate strategy, explained,
A cascade of small events is creating a large splash in a structurally ever-thinner market.
Cites among factors behind selloff: bond supply and rate locking; higher German inflation and euro-area M3; bearish risks from FOMC statement
Global monetary easing stoking inflation expectations may be another
Large volumes are going through in futures with stop losses being triggered and few dealers willing or able to take the other side, similar to UST flash crash of Oct. 15
Markets will have to get used to erratic swings, with banks being forced to curtail balance-sheet capacities and central bank interventions undermining trading liquidity
Still sees bearish risks from Fed decision even after today’s correction in bunds
Charts: Bloomberg
