Europe’s bond rout is about to face a combination of limited supply, higher redemptions and central-bank purchases that threatens to halt the selloff in its tracks.
German 10-year bunds just suffered their worst week since 1998 on signs inflation is picking up and as European Central Bank President Mario Draghi told investors to get used to higher volatility. Richard McGuire of Rabobank International said the declines will prove temporary as bonds are supported by a range of factors over Europe’s summer months.
“We think in the near term that we should see a retracement of bund yields,” said McGuire, the London-based head of European rates strategy at the lender, which is a primary dealer of German debt. “There’s a constructive supply outlook in the coming months.”
The yield on German 10-year bunds climbed 36 basis points, or 0.36 percentage point, to 0.84 percent as of 5 p.m. London time on Friday, the biggest weekly increase since October 1998. The 0.5 percent security due in February 2025 fell 3.31, or 33.10 euros per 1,000-euro ($1,111) face amount, to 96.81.
The yield touched 0.996 percent on Thursday, the highest since September.
Euro-area securities started plunging Tuesday after a report showed the first price increases in six months. The drop left a Bloomberg index of euro-area bonds with a 0.6 percent loss this year through Thursday. As recently as April, the measure showed a 4.6 percent return.
All told, a net 89.4 billion euros will be taken out of euro-region bond markets in July, followed by 29.9 billion euros in August, McGuire estimated. The yield on 10-year bunds will fall to 0.6 percent by the end of the third quarter, he forecast.
Further complicating the picture for bondholders is Greece, which last week notified the International Monetary Fund that a 300 million-euro payment due Friday would be deferred.
The yield on Greek two-year notes surged 176 basis points in the week to 25.22 percent, though that’s still below the 25.86 percent it touched in May and the more-than 200 percent level reached in 2012.