Pacific Investment Management Co.’s Andrew Bosomworth said a bubble is starting to form in Germany’s government bond market as Spain moves closer to a request for financial support.
Germany’s 10-year bund yield may still fall below 1 percent, Bosomworth, a money manager at the Newport Beach, California-based company, said in an interview on Bloomberg Television’s “City Central” with Francine Lacqua, Guy Johnson and David Tweed. U.K. 30-year gilt yields may also “go a lot lower” as investors seek protection from the European debt crisis, he said.
“The world looks at Germany as the only real AAA sovereign balance sheet out there,” Bosomworth said in the interview in London. “If there’s a bubble, we’re seeing the beginnings of one in that market. Japan is a good benchmark so we could even go through 1 percent on 10-years if things get worse.”
The German 10-year bund dropped to a record 1.345 percent today from last year’s high as 3.51 percent on April 11, 2011. Europe’s benchmark government bond yielded 1.36 percent as of 4:48 p.m. in London.
The yield is 74 basis points below the rate of consumer-price inflation. The so-called real yield has been less than zero since August.
“From a bubble perspective you look at real yields and German bunds are really in negative territory,” he said.
Germany’s government bonds returned 13.4 percent in the past year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish bonds dropped 0.4 percent bonds, and Italy’s dropped 0.3 percent, the indexes show.
Spain may also be forced to seek further assistance and have to tap an external balance sheet one way or another, Bosomworth said.
“It clearly wants to avoid the form that the other countries have taken so far because their experience hasn’t been good,” he said, referring to the bailouts for Greece, Ireland and Portugal that required them to comply with austerity measures as a condition for the aid.
While purchases of Spanish bonds by the European Central Bank would help the market, the support wouldn’t last indefinitely, he said.
“It’s like morphine, it works for a bit but it only works for so long and if you don’t attack all those underlying problems, when that liquidity wears off you’re back to square one,” Bosomworth said.
The U.K. 30-year gilt yield was little changed at 3.09 percent after dropping to 3.04 percent on May 25, the lowest since Feb. 1.
“The U.K. has had some pretty low real yields as well but 3 percent on 30-year gilts with the euro-zone going further down the path of disintegration,” Bosomworth said. “Those 30-year yields in the U.K. could go a lot, lot lower.”
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