Investors gave the clearest sign yet they’re losing patience with the record-low yields on euro-area government bonds in a selloff that spared no market.
Yields on Germany’s bunds surged the most in two years as traders shunned an auction of the nation’s debt. Bond titan Jeffrey Gundlach of DoubleLine Capital egged on the declines, saying he’s considering making an amplified bet against the securities. His comments echoed Janus Capital’s Bill Gross, who once managed the world’s largest bond fund. He said bunds were the “short of a lifetime.”
The bond slump reflects growing angst among investors after the European Central Bank’s 1.1 trillion-euro ($1.2 trillion) quantitative-easing program sent yields to unprecedented lows from Germany to Spain. Emerging signs of inflation in the 19-nation economy are also hurting demand.
“These are influential voices that offer a contrarian view when the German bond market appears to be at an extreme level, so there’s definitely going to be an impact on the market,” said Salman Ahmed, a global strategist at Lombard Odier Investments Managers in London.
German 10-year bond yields rose 12 basis points, or 0.12 percentage point, to a seven-week high of 0.29 percent as of the London close. That’s the biggest jump since January 2013. The 0.5 percent bund due in February 2025 fell 1.195, or 11.95 euros per 1,000-euro face amount, to 102.075.
The volume of bund futures contracts traded climbed to 1,099,253, the most since March 5.
Germany got bids of 3.649 billion euros at its notes auction, short of the 4 billion-euro sales goal. It’s the first time an auction of five-year debt missed the target since Jan. 21 and the third bond sale that was technically uncovered this year, according to data compiled by Bloomberg. The nation sold the securities due in 2020 at an average yield of minus 0.07 percent.
Adding to the supply pressure, Italy auctioned 8.25 billion euros of debt on Wednesday, while Portugal sold 2.5 billion euros of 10- and 30-year bonds via banks.
Bonds extended losses across Europe amid signs inflation is reviving in the region, reducing the value of fixed payments on bonds.
Growth in euro-area M3 money supply, which policy makers see as a gauge of the underlying strength in economic activity, averaged an annual 4.1 percent in the first quarter, the fastest pace since 2009, according to ECB data published Wednesday.
The annualized inflation rate in Germany quickened to 0.3 percent in April from 0.1 percent last month, according to European Union-harmonized data published by the Federal Statistics Office in Wiesbaden on Wednesday.
Italian 10-year bond yields climbed 13 basis points to 1.51 percent and Portugal’s 10-year bond yield jumped 15 basis points to 2.12 percent.
“Portugal issuance is dragging the periphery lower,” said Owen Callan, a fixed-income strategist at Cantor Fitzgerald LP in Dublin. “Germany issuing five-year as well into an already weak market. At the same time as some comments from more and more people about the unsustainability of negative euro-zone rates.”
Norway’s $900 billion sovereign wealth fund, the world’s biggest, is betting the recent bond gains won’t last. Speaking in an interview in Oslo, Chief Executive Officer Yngve Slyngstad said he’s weighting the 2.5 trillion-krone ($334 billion) bond portfolio to shorter maturities, meaning it will outperform when rates rise.
Others are also complaining about the record-low yields. Billionaire hedge-fund manager Alan Howard said this week it’s “just crazy” to hold bonds with negative yields.
Gundlach said in a Bloomberg Television interview on Tuesday: “let’s say you leverage up the German two-year 100 times, that’s a 20 percent return,” referring to the potential bet against the securities.
Lombard Odier’s Ahmed disagrees with Gundlach. “It might take a long time for these short positions to work,” he said. “One can’t rule out the possibility of a Japan scenario for Europe. There could be more than one round of QE.”