German government bonds have become the preferred haven as a global bond sell-off pushes yields higher almost everywhere else. Bund yields fell this week even as French, Italian and US borrowing costs climbed, widening the gap between Germany and its peers to levels last seen more than a decade ago.
The yield on 10-year Bunds has fallen 0.17 percentage points this week, even as borrowing costs rose elsewhere. French and Italian 10-year yields climbed 0.14 and 0.07 percentage points respectively over the same stretch. US yields gained 0.07 percentage points over the week despite a partial recovery after weak jobs data.
Investors crowd into Core Europe
According to the Financial Times: "Demand for safety — Bunds — is on the up", said Reinout De Bock, head of European rates strategy at UBS, pointing to an economic cycle marked by resilient growth, energy price risks and broadening demand for capital. Ales Koutny, head of international rates at Vanguard, said core Europe is emerging as the safe-haven allocation, naming Germany, the Netherlands and Switzerland.
Koutny pointed to Germany's lower debt-to-GDP ratio, stronger fiscal credibility and lower policy uncertainty as reasons for the shift. He added that hedge funds have been forced to unwind trades betting on Italian bonds outperforming Bunds, a reversal he described as wild.
French budget fears widen the spread
A looming French budget and next year's presidential election have revived investor concern over unsustainable debt piles in the region, and Italian and Greek bonds sold off in sympathy with French debt on Thursday. France's spread over Germany hit 1.5 percentage points on Friday, its highest since 2012, before narrowing to 1.4 points later in the day.
Mizuho multi-asset strategist Evelyne Gomez-Liechti called the widening in eurozone spreads violent, saying it triggered an aggressive flight-to-quality bid into Germany. The sell-off also pushed the premium on five-year French bonds over euro interest rate swaps to 0.8 percentage points, the widest gap since 2011, hitting investors who had bet against that spread with leverage.
De Bock said he is now recommending clients buy German debt and bet against Italian debt, favoring Bunds over jointly issued EU bonds as the safest asset to hold. RBC Capital Markets global macro strategist Peter Schaffrik said the market has concluded that slower-growing economies cannot sustain current yield levels, while Germany continues to grow decently.
Source: Financial Times
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