From FTAlphaville comes a series of quotes from bond bears awakening from slumber.
Jen Nordvig of Nomura:
The size of bond moves today should not be underestimated. For example, the moves in the Italian 30-year bond today were substantially larger than anything seen in the Euro-crisis! (in price terms, which is what matters for PnL).
Importantly, bond weakness is a global phenomenon, and the very largest bond markets are impacted. Hence, the moves certainly have potential to impact sentiment through portfolio contagion.
…Our positioning indicators show that the overhand of USD longs has been reduced further, but that the level of such positions remains fairly significant (see USD unwinding continues, 3 May 2015). In addition, the combination of weakness in fixed income and equities, and a bounce in the Euro is likely to be rather painful for many systematic traders. Hence, there could be a compounded effect on this yet ahead of us (i.e., more unwinding).
From Citi:
Choppy markets in both core and periphery yields: A sharp rise in Bund yields and periphery spreads is tantamount to the increased volatility in European fixed income markets. In April the EGBI posted its first negative monthly performance since Dec-13 (-1.4%) and we’re starting to see initial signs of foreign investors selling international bonds. In the periphery, we continue to see wider spreads over the near-term given volatility in Greek yields and the wider headline risk – with positioning not helping. We remain cautious until more certainty is achieved regarding the sovereign’s future funding arrangement.
1% 30y Bund did not cap. We published yesterday that 1% in 30y Bund would be the first test of demand at higher rates. That proved temporary as futures drive selling. Markets are still seeking out the pain trade for longs. We exited a bear risk trade ( 5y5y CHF v. EUR ) on the basis that levels have now taken out much of the QE premia effect but momentum selling remains firm.
Julien Jason Guillaume of Gavekal:
Comparisons are being made with the “taper tantrum” in May 2013 when both bond and equity markets suffered big losses. This time, however, a bond market crash is unfolding in Europe in spite of the European Central Bank being on the bid for pretty much every fixed income asset in the continent. Hedge funds which were happy to front-run the ECB’s quantitative easing program a few months ago, are now choking on their exposure, causing peripheral yields to rise some 70bp since March. The march towards Grexit is being cited as one reason, but this does not pass muster—if Greece were the reason then a flight to safety should be unfolding, and so US and German yields should be falling, not rising.
In Europe, another factor may be the absence of a bond investor rotation from “fast money” to “slow money”. Even as hedge funds head for the exit, Europe’s institutional investors are unwilling and/or unable to take their place as core yields remain very low, while regulation and risk management mitigates against peripheral bond purchases. Such a scenario suggests that the ECB, quite remarkably, could be losing control of a market that only a few weeks ago it seemed to have all but sewn up.
A less alarming parallel can be seen in Japan’s similar embrace of QE. A few months into its program, in May 2013, a similar sell-off occurred with 10-year government bond yields soaring in a matter of days from below 0.5% to almost 1%. However, it gradually became clear that the yield compressing effect of financial repression was far stronger than any reflationary effect. Today 10-year JGBs yield 0.28%, having steadily declined after the mini panic of two years ago.
And Andrew Smithers, at Pelham Smithers Associates:
The assumption that short-term real interest rates depend on growth is, however, dubious in theory and useless in practice. There is no apparent historic relationship between real interest rates and world growth. Sensible analysis will be based on the cyclical prospects for individual economies…
7. The UK and the US appear to have little if any spare capacity and to be growing above trend. Interest rates should therefore be rising already or in the near future. If the Bank of England and the Federal Reserve delay, the subsequent rises will need to be greater than they otherwise would have needed to be.
8. I don’t expect these central banks to raise interest rates soon. This may prove justified. The gap between current and trend growth rates may narrow. The UK and the US economies may slow, or their trend rates rise through improvements in productivity or participation rates.
9. Investors do not therefore need to worry immediately, but they should do so if the gaps don’t narrow, as investors’ expectations seem complaisant.
OK, so there are no bond bears left! That seems a bit scary in itself but I’m on board with much of the above. The biggest risk right now is an inflation spike on an oil rebound not the closing output gaps in the West (which are bigger than they appear) but I don’t expect the rebound to get much further and to retrace some anyway.
For all of that, it must be remembered that when everyone is on one side of the ship then it only takes a ripple to send them all scurrying to the other side.
