May 14, 2015 / 3:26 PM / 3 years ago

German Bund yields near 2015 highs as sell-off rumbles on

(Updates prices)

By Marius Zaharia

LONDON, May 14 (Reuters) - Benchmark German 10-year Bund yields held near 2015 highs on Thursday as a global retreat from fixed income assets rumbled on despite macroeconomic data that would normally be supportive for bond markets.

Yields on U.S. Treasuries rose in early trades even though U.S. retail sales figures on Wednesday disappointed those expecting an economic rebound from a weather-weakened first quarter. A weaker outlook usually pushes investors towards the perceived safety of bonds.

The spring back in yields from near-zero levels began on April 29, coinciding with very low, but better-than-expected German inflation figures. Selling snowballed as a small rise in yields on bonds that barely pay a coupon translated into deep falls in prices and major losses for investors who were almost all positioned for a further drop in yields.

The European Central Bank hoovering up bonds from the market under its 1 trillion-euro quantitative easing programme is exacerbating the usual liquidity drought associated with spikes in volatility, magnifying market moves.

The sell-off has taken on a life of its own, with market technicalities such as positioning and liquidity trumping economic news.

Bund yields were a touch lower on the day at 0.70 percent, but close to their 2015 high of 0.799 percent hit last week. They traded as low as 0.05 percent in mid-April.

Moves are erratic. On Wednesday, Bund yields fell below 0.60 percent before bouncing as high as 0.78 percent, with no particular trigger to point to.

“You’ve got wild swings at the moment,” Rabobank rate strategist, Lyn Graham-Taylor, said.

“There had to be a point where the market sells off because of higher inflation expectations, but it’s been more aggressive because the lack of liquidity.”

The amount of bonds available for trading is likely to fall even further. Commerzbank estimates debt redemptions, coupon payments and ECB purchases would exceed government bond sales by 300 billion euros from June until the end of the year.

This, however, might lead to scarcity in the bond market and eventually halt the recoil in yields, they said.

Other euro zone bond yields were flat to a touch lower, with several European markets closed for a public holiday.

Ireland sold 750 million euros of seven-year bonds on Thursday at a yield of 0.81 percent. The country is already fully funded for the remainder of the year and has raised over 10 billion euros out of its guided range of 12 to 15 billion euros of debt to fund the state for 2016.


The latest rise in yields raises questions about the safe-haven properties of top-rated German debt. Many investors use German Bunds to counter volatility in equity markets with the two assets traditionally going in opposite directions.

But with central banks pouring trillions of dollars into government debt, that relationship has become distorted. The sell-off in bonds is now affecting stock markets as well.

The pain is greater in long-dated bonds.

Thirty-year Bund yields have risen by one percentage point in the past three weeks. But the price swing has been dramatic, with the bond losing a fifth of its face value over that period.

“As yields rise, there is less need for investors to reach for yield into the long end,” Societe Generale strategists said in a note.

“Heads 30-year yields go up, tails 30-year prices fall.” (Editing by Louise Ireland and John Stonestreet)

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