European Bond Sell-Off Continues, Squeezes Euro Higher And Weighs On Stocks

 

 

The dramatic sell-off in European bonds continues apace today.  In part, sparked by the easing of deflation pressure, there is a taper tantrum of sorts being played out.  The 10-year German bund yield is 18 bp to 76 bp.  Recall that about a month ago it was at 5 bp, and everyone knew it was going to go negative.  

This is the first time since January 2014 that the yield has moved above its 200-day moving average.  The 78-80 bp area represents an interesting technical area, corresponding to the high from December 2014 and also a minimum retracement objective of the slide in yields since January 2014.  Above there and the 90-92 bp area attracts.  

The sell-off in bunds is serving to drag down the entire European bond complex.  At the beginning of the rout, the spreads with the periphery widened.  It is not unusual for the peripheral premiums to widen in a higher interest rate environment.  However, more recently, including today, the premiums are narrowing.  

The market appears to have all but ignored the smaller than expected rise in German factory orders (0.9% vs 1.5% consensus).  French industrial output figures were also softer than expected (-0.3% vs 0.1% consensus), though French manufacturing was stronger.  Specifically, manufacturing output in France rose 0.3% (consensus 0.2%) and the February series was revised to 0.5% from flat.  The market has already largely taken on board the fact that the euro zone economy accelerated in Q1 and  surpassed the US, which after this week’s trade blowout, will likely be revised to show that the world’s largest economy actually contracted in first part of this year.  

The dramatic position adjustment underway in Europe appears to be the key factor lifting US yields.  It is not the US data.  The pace may be of some concern, but the direction probably is not. Specifically, there is a gap between the Fed and the market views.  Yesterday Yellen again warned that US long-term rates could rise after the Fed lifts the Fed funds target.   To avoid this being disruptive, it is best if the adjustment were stretched over a period of time.