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London - The drop in global government bonds gathered pace on Thursday, spilling over to equities, as German bond yields climbed to their highest level in 18 months in a sign that a hawkish shift by central bankers is penetrating the market.
While analysts described the moves as technical, most remain bearish on bonds, as investors continue to adjust to comments by European Central Bank President Mario Draghi last week that spurred speculation policy makers will announce a tapering of bond purchases before the end of the year.
Bonds across Europe fell after the results of a French debt auction showed a drop in excess demand for 30-year securities. Trading volumes in bund futures contracts jumped after the auction results were announced, sparking the surge in yields. The move gathered momentum as the yield rose above 0.51%, which Citigroup highlighted as “strong support.”
“There was some heavy supply from France which I think started it,” Antoine Bouvet, an interest-rate strategist at Mizuho International in London, said in emailed comments. “The magnitude of the sell-off is excessive compared to what you would expect from a soft auction.”
The yield on German 10-year bunds rose seven basis points to 0.54% as of 13:32, the highest level since January 2016. More than 580,000 bund futures contracts were traded, about 1.7 times the number traded as of the same time on Wednesday.
There is “probably no justification for bund yields to trade above 0.50%,” Bouvet said.
France’s auction of 30-year debt saw a bid-cover ratio of 1.53 times, compared with 1.93 at the previous sale on January 5.
Policy signalling
The minutes of the ECB’s policy meeting in June showed that there was “broad agreement” among members to retain the easing bias and cautioned that “even small and incremental changes in communication could be perceived as signaling a more fundamental change in policy direction.”
While the monetary authority is “not in any hurry to tighten policy, the break-out of the range in bunds that has prevailed for more than six months does suggest more upside for yields,” Jan Von Gerich, a strategist at Nordea Bank said in emailed comments.
The ECB’s minutes should not be hawkish, or perceived as such, as a recalibration wasn’t discussed in June, Cyril Regnat, a strategist at Natixis SA, said in emailed comments said in comments before an account of the June meeting was released.
HSBC sees the recent bund declines as the start of a move toward year-end target of 90 basis points as “complacent long positions” are shaken out of the market by what appears to be a change in central bank focus, strategists including Steven Major wrote in an emailed note.
The sell-off, they wrote, shows that the market had been pricing in a surprisingly low probability of the ECB paring down its quantitative easing. HSBC predicts that 10-year bund yields may be range-bound in the short term, especially given lingering geopolitical risks.
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