Italian and Spanish 10-year government bonds led a rally in euro-area sovereign markets as the highest yields this year attracted investors.
The securities erased intraday losses that earlier pushed yields to levels that drew buyers to the nations’ debt, supported by purchases by the European Central Bank under its quantitative-easing program. The recent selloff in fixed-income markets was driven by a rebound in oil prices and improvement in economic data that fueled speculation that the 30-year bull market in bonds is coming to an end.
“The volatility is very large,” said Jan von Gerich, chief strategist at Nordea Bank AB in Helsinki. “The strength of this turnaround suggests there is still also plenty of opposite interest out there. It’s probably also the shock that yields can move this much in a matter of days after so much conviction that the ECB had anchored yields for good.”
Italy’s 10-year bond yield fell one basis point, or 0.01 percentage point, to 1.79 percent as of 1:15 p.m. London time after jumping 27 basis points on Tuesday. The yield touched 1.97 percent earlier on Wednesday, the highest this year. The 1.5 percent security due in June 2025 rose 0.13, or 1.30 euros per 1,000-euro ($1,125) face amount, to 97.385.
Similar-maturity Spanish bond yields dropped two basis points to 1.76 percent, after climbing to 1.96 percent, the highest since Nov. 27.
“The market has come a long way and the recent selloff brought bond yields back to levels that some see as attractive,” said Luca Cazzulani, a senior fixed-income strategist at UniCredit SpA in Milan. “While recent data has shown some improvement, leading some investors to reassess the inflation outlook, the ECB has made it clear it will stay accommodative for a while.”
The yield on Germany’s 10-year bund, the euro area’s benchmark sovereign securities, increased five basis points to 0.56 percent after rising to 0.59 percent earlier on Wednesday, the highest level since Dec. 29.
The price swings in debt markets were exacerbated by thin liquidity caused by central banks’ bond-buying programs, analysts said. Since Lehman Brothers Holdings collapsed in 2008, central banks in the U.S., Japan, the U.K., and the euro region have withdrawn $8 trillion of bond securities from the market under their quantitative easing policy aimed at supporting growth, according to JPMorgan Chase & Co.
In Europe, the ECB bought 95.1 billion euros of government debt through the end of April, up from 47.4 billion euros at the end of March, the month it started the purchases.
“The fundamentals have not changed, but bond markets have,” said Christoph Rieger, the Frankfurt-based head of fixed income strategy at Commerzbank AG. “The European bond markets are broken, hampered by low yields, high regulation and central bank intervention. Markets will have to get used to these erratic swings.”
Volatility on 10-year bund futures contracts rose to the highest in almost three years. Sixty-day volatility, a measure of anticipated price swings, climbed to 8 percent on Wednesday, from about 4.6 percent at the start of the year and the highest since August 2012.
European bonds have room to rebound after the recent correction that brought them back to “more fundamentally sensible levels,” according to John Wraith, a fixed-income strategist at UBS Group AG in London.
“Having seen this selloff in government bond markets, it’s going to run its course fairly soon,” Wraith said in an interview on Bloomberg Television’s “Countdown” with Mark Barton and Manus Cranny. “Things are going to settle down and we’re going to wait for the next page of the story. But for now certainly those risks of deflation, perma-low yields and negative rates seem to be retreating somewhat.”