The key feature of the past two days was neither the disappointing US GDP report, nor Japan's failure to boost QE, nor the Fed's muddled, confused statement but the huge rout in German "short of a lifetime" Bunds on close to record volume.
What caused it?
As Bloomberg summarizes the various opinions suggested by Wall Street analysts, the rout in German debt and other European sovereign bonds was caused by market-technical factors such as investor positioning and supply glut rather than shift in views on economic outlook, analysts say, with profit-taking on successful QE trades, thin market liquidity and position-squaring before month-end are cited among main bearish catalysts.
A detailed breakdown by firm:
UBS (Mike Schumacher, Nishay Patel)
- Spike in bund and UST yields over past two wks bolsters confidence in bearish call
- Favor positioning for higher yields via France 5/10 steepeners and by paying EUR 5Y/5Y swaps
- Weakness largely driven by technical factors, such as positioning, not fundamentals
Allianz Global Investors (Mauro Vittorangeli)
- This isn’t start of bear market in bonds or developments that would persuade ECB to mull tapering QE early
- Price action is more related to S/T supply and demand factors, as investors take profits and unwind ECB trades
RBS (Giles Gale)
- Maintain L/T positive stance on German 10Y debt even after selloff
- Weakness probably isn’t start of root-and-branch reappraisal of desired positioning and fundamentals; technical correction is the more likely explanation
- Still see 10Y yields dropping to -0.13% on inflation, QE and now-cleaner positioning
RBC Capital Markets (Peter Schaffrik)
- While no single driver for rout, position-squaring likely played a big role; “all that had gone up went down yesterday”
- Good chance of more such moves in future; bond mkts have already taken a lot of bad news into account
- Too early to favor outright shorts given Greek woes and tepid U.S. data
- Prefer “semi-shorts,” such as B/E wideners, and U.S. 5/10 steepeners, U.K. 5/30 steepeners and short-end longs in spread products in euro area
Citigroup (Harvinder Sian)
- While uncovered bobl auction isn’t necessarily a signal, progressively weak sales could point to changing investor behavior
- Anecdotal evidence suggests some buying on dips and little by way of significant selling flows
HSBC (Bert Lourenco)
- Yday’s rout in euro-area govt bonds was probably driven in part by “technical momentum players” amid supply glut
- Stays constructive on EUR rates over longer term on inflation outlook, QE
- Commerzbank (Christoph Rieger)
- Cascade of small events created a large splash in a structurally ever-thinner mkt, similar to UST flash crash of Oct. 15
- Test of zero line for 10Y yields should have been averted for now, with price bounces being used to reduce duration risk
In short, "more sellers than buyers"