Investors seek refuge from bond rout in haven German debt

{"text":[[{"start":7.6,"text":"German government debt has emerged as the pre-eminent haven in the global bond rout, as concerns about an overheating US economy and fiscal worries elsewhere in Europe leave investors with few other places to turn. "}],[{"start":20.299999999999997,"text":"The yield on 10-year Bunds has fallen 0.24 percentage points this week, even as borrowing costs have continued to rise elsewhere. French and Italian 10-year bond yields have risen 0.2 and 0.12 percentage points respectively this week, while US yields were flat after a sharp rally on Friday following weak jobs data. Yields fall if the price of the bond rises. "}],[{"start":45.449999999999996,"text":"“Demand for safety — Bunds — is on the up,” said Reinout De Bock, head of European rates strategy at UBS, amid a bond sell-off caused by an “[economic] cycle like no other with resilient growth, energy price risks and a broadening demand for capital”."}],[{"start":61.89999999999999,"text":"“Core Europe is emerging as the safe-haven allocation,” said Ales Koutny, head of international rates at asset management Vanguard, pointing to Germany but also the Netherlands and Switzerland, which have enjoyed almost as large falls in borrowing costs this week."}],[{"start":78.29999999999998,"text":"“First, it’s the historical benefit that they get from lower debt to GDP, better fiscal credibility and lower policy uncertainty,” he said. He added that the “amount of trade unwinds that we have seen has been wild”, as hedge funds have been forced to dump popular trades such as betting on Italian bonds outperforming Bunds this week."}],[{"start":null,"text":"

"}],[{"start":96.09999999999998,"text":"Data pointing to powerful US economic growth has triggered a sharp sell-off in Treasuries in recent weeks, as investors have bet that the Federal Reserve will need to keep interest rates higher for longer to stop the economy from overheating. US government bonds posted their worst month since 2022 in September."}],[{"start":115.49999999999997,"text":"At the same time, a looming French budget and a fraught presidential election next year have brought investors’ attention back to the question of unsustainable debt piles in the region. Government bonds in Italy and Greece, both formerly the focus of market worries over debt, sold off in sympathy with French bonds on Thursday. "}],[{"start":133.14999999999998,"text":"A big drop in German yields on Friday further drove up the additional interest rates that countries such as Italy and France pay on their 10-year debt relative to Germany’s. "}],[{"start":144.39999999999998,"text":"France’s so-called spread over Germany hit 1.5 percentage points on Friday, its highest level since 2012. Evelyne Gomez-Liechti, a multi-asset strategist at Mizuho, described it as a “psychologically important” level. "}],[{"start":159.34999999999997,"text":"The “violent” widening in Eurozone spreads on Thursday has “triggered an aggressive flight-to-quality bid into Germany”, she said. "}],[{"start":167.34999999999997,"text":"There has been a particularly sharp move in so-called swap-spread trades, such as when investors buy French bonds and bet against interest rate swaps of the same maturity, typically using leverage. "}],[{"start":179.84999999999997,"text":"The broader bond sell-off has almost doubled the additional yield on five-year French bonds relative to the equivalent euro interest rate swaps since the start of the week to more than 0.9 percentage points, the biggest gap this century. That has forced losses on those betting on bonds against swaps."}],[{"start":198.29999999999995,"text":"Such idiosyncratic risks among several European countries had whittled down the options for investors looking to allocate outside the US, de Bock said."}],[{"start":208.04999999999995,"text":"“There has been rising demand for diversification” away from US Treasuries, he said. “People want to allocate into Europe” but there were “weak links, countries with higher deficits . . . the universe [of safer bond markets] is smaller than you thought”, he said. "}],[{"start":222.04999999999995,"text":"De Bock said on Friday he was recommending that clients buy German debt and bet against Italian debt after the recent sell-off. He said he had previously used EU bonds, issued by the bloc as a whole, as the portion that clients should buy, but “I prefer to have a long that is really focused on the safest asset, which is Bunds”."}],[{"start":242.09999999999997,"text":"Investors were reassessing the risks around so-called peripheral Europe, including France, said Peter Schaffrik, global macro strategist at RBC Capital Markets. "}],[{"start":252.44999999999996,"text":"“The market has figured out that for the slower-growing economies, these yield levels are unbearable; the economy can’t live with it,” whereas “Germany is still growing decently,” he added."}],[{"start":270.4,"text":""}]],"url":"https://audio.ftcn.net.cn/album/a_1790951072_7711.mp3"}