For all the hand-wringing over the slide in euro-area bonds, German yields have climbed only to December levels and all but two of the region’s debt markets have made money this year.
That’s good news for governments that are still able to fund themselves close to historically low levels, but is a concern for bondholders bracing for more price declines as markets try to work out where yields should be.
Barely three weeks ago, 10-year bund yields were the closest they’d ever come to reaching zero, driven lower by the European Central Bank’s unprecedented bond-buying program designed to avert deflation. A growing resistance among investors, coupled with improving economic data, are prompting a reassessment.
“It suggests that maybe we’ve seen a low point in terms of European yields,” said Owen Callan, a fixed-income strategist at Cantor Fitzgerald LP in Dublin. “The market realizes now that it’s a two-way risk and it’s not just simply a case of yields can only go one way and that’s lower. There’s now an acceptance that the market was positioned far too much one way.”
Cash-strapped Greece and Finland are the only two euro-zone debt markets to post negative returns since the end of 2014, according to Bloomberg World Bond Indexes. Even after Portugal’s 10-year yields jumped to the highest since February last week, its bonds have still earned 3.7 percent this year through Monday.
Since falling to a record 0.049 percent on April 17, Germany’s benchmark 10-year bond yield has climbed back to 0.68 percent as of 4:11 p.m. London time Tuesday, having reached 0.78 percent on May 7. That was still only the highest level since Dec. 8 and compares with an average 2.73 percent yield over the past decade.
Low yields mean investors are more vulnerable to losses because they no longer receive enough in interest payments to provide an “income cushion” against “capital downside,” Anthony Doyle, investment director at M&G Group Plc in London, wrote in an article posted on the company’s website on Monday.
“The collapse in yields across the fixed-income spectrum now means that investors are at greater risk of higher drawdowns than ever before,” he wrote. “The income component of their total return is unlikely to adequately compensate for any hits to capital returns like it would in the old days.”
The extent of the global selloff may have caught analysts by surprise, based on Bloomberg surveys.
Germany’s 10-year bund yield is forecast to be at 0.23 percent by June 30 and rise to only 0.5 percent by the end of the year, based on the median of predictions compiled by Bloomberg News.
“There have been a number of speculators who bought bunds in the past in order to make use of quantitative easing and sell them back to the central banks at higher prices and lower interest rates,” Allianz SE Chief Financial Officer Dieter Wemmer said in a conference call with reporters on Tuesday. “These deals have been distorted for some reasons.”