Aberdeen Sells Bunds Against Treasuries on ECB's Surprise Tone

  • Trade has been lucrative in last few weeks: Aberdeen’s Bishop
  • He may close position if spread narrows a further 10-15 bps

Aberdeen Asset Management sold German bunds against U.S. Treasuries, citing risks investors have yet to price in a potential policy tightening from the European Central Bank, unlike that of the Federal Reserve.

“Given the ECB is talking about unwinding its balance sheet and would potentially be hiking rates, that was a bigger potential surprise in the markets,” said Nick Bishop, director and head of Australian fixed income at Aberdeen, in an interview in Singapore. “The markets are very comfortable with the idea the Fed is raising rates. That’s pretty much priced in the curve.”

The yield premium that 10-year Treasury notes offered over similar-maturity bunds has shrunk about 50 basis points from its peak in December. The defeat of anti-euro nationalist Marine Le Pen in the French election damped demand for haven assets in Europe, while a pickup in euro-area inflation fanned speculation the ECB will consider scaling back its loose monetary stance.

Minutes released from the ECB’s council meeting in April last week showed policy makers disagreed on the risks facing the region’s economy and will revisit the issue at the June 8 meeting. The discord fueled the debate over when the central bank might start discussing how to withdraw stimulus as the euro-area economy recovers. 

Bishop said selling bunds against Treasuries has been a lucrative trade in the last few weeks and since initiating the position, the 10-year yield spread has tightened by about 25 basis points. The fund manager said he may exit the trade if the premium shrinks an additional 10 to 15 basis points. The position was executed via 10-year bond futures and hedged against currency risk with forwards, he added.

The ECB will need to “demonstrate backbone” when price pressures increase again, Bundesbank President Jens Weidmann said an interview with Austria’s Der Standard. The central bank should use the June meeting to start building the case for unwinding its monetary stimulus before making an announcement in the fall, Governing Council member Vitas Vasiliauskas said Thursday.

The yield differential between 10-year bunds and Treasuries, at about 185 basis points, is expected to widen to 205 basis points in the fourth quarter, according to analyst estimates compiled by Bloomberg.

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