Selloff in European Bonds Reaching Limits, Credit Agricole Says

  • German bunds to ‘struggle to sell off from current levels’: CA
  • Ten-year bunds decline for a second consecutive week

This month’s slump in European government bonds has likely run its course, according to analysts at Credit Agricole SA’s corporate- and investment-banking unit.

Speculation that the European Central Bank will pare its asset-purchase program weighed on the region’s sovereign debt. Germany’s 10-year bunds headed for a second weekly decline that pushed yields to the highest in a month. While investors remained skeptical about taper talk, it has revived focus on the scarcity of bonds available for the central bank’s quantitative easing plan and its ability and willingness to extend accommodative policy.

Direction in bunds will be driven by U.S. Treasuries, where “the room for selloff from current levels is limited,” Credit Agricole analysts, led by Mohit Kumar, London-based global head of rates strategy, wrote in a client note.

“The bond market selloff over the last two weeks has created attractive dislocations” in Europe as well as global government bonds, the analysts wrote. Tracking moves in Treasuries, German bunds “would also struggle to sell off from current levels” unless the ECB makes “technical adjustments” to its QE program.

‘Attractive Carry’

To take advantage of the recent selloff, investors who want to add longer-duration bonds to their portfolios should favor the eight- to 10-year segment of the German bund curve, which benefits from “attractive carry” and is relatively cheap, according to Kumar.

Benchmark German 10-year bund yields rose two basis points, or 0.02 percentage point, to 0.053 percent as of 3:03 p.m. London time, two days after touching the highest since Sept. 14. The zero percent security due in August 2026 fell 0.143, or 1.43 euros per 1,000-euro ($1,103) face amount, to 99.48. The yield has climbed 17 basis points this month.

Treasury 10-year note yields increased two basis points to 1.76 percent, having reached 1.80 percent on Wednesday, the highest since June 3. The 10-year yield has “moved to the top end of the recent trading range,” the Credit Agricole strategists wrote.

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