Investors revolting against negative yields in Europe wiped 55 billion euros ($61 billion) off the value of the region’s government bonds in one day.
The value of European debt dropped to 5.844 trillion euros on Wednesday, the lowest level since March 30, in Bank of America Merrill Lynch’s Euro Government Index.
Signs of inflation in the 19-nation economy prompted traders to pare bets the European Central Bank’s quantitative-easing plan would drive up prices on the continent’s benchmark securities. Germany’s 10-year bonds suffered their deepest two-day loss in more than three years.
The European Central Bank’s 1.1 trillion-euro quantitative-easing program gives cause to avoid the region’s government bonds, said Steven Wieting, global chief investment strategist in New York at Citigroup Inc.’s private bank. Wieting said on April 29 the bank cut allocation to German bunds in favor of U.S. Treasuries in the five- to seven-year range.
“There is no reason to accept negative yields for the same reasons that institutional investors might,” said Wieting, whose funds hold a smaller amount of bunds than indexes recommend. Since his bank advises some of the world’s most affluent families, with assets that total $374 billion, Wieting isn’t required to hold easy-to-trade sovereign debt. “Private-wealth clients don’t need to follow that particular herd.”
Last week, Bill Gross, who ran the world’s largest bond fund until last year, called the 10-year German bund the “short of a lifetime.” DoubleLine Capital’s Jeffrey Gundlach said on Tuesday he’s considering making an amplified bet against German bonds to join a growing group of top money managers wagering against the debt.
Wieting at Citigroup said the effect of quantitative easing in Europe can be seen by looking at the U.S. experience of the past four years, when record stimulus boosted stocks and corporate bonds and made government bonds more expensive.
“Our outlook for Europe is generally one of reflation,” he said. Investors should avoid being lenders in Europe’s public debt markets, he said. “You can go there to borrow.”
German 10-year bond yields rose more than 20 basis points, or 0.2 percentage point to 0.37 percent, the biggest two-day increase since November 2011.
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.