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. 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 following weak jobs data.
"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".
"Core Europe is emerging as the safe-haven allocation," said Ales Koutny, head of international rates at Vanguard, pointing to Germany but also the Netherlands and Switzerland. He noted 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.
French bond spreads hit 1.5 percentage points, its highest since 2012, triggering an aggressive flight-to-quality bid into Germany. The broader bond sell-off has nearly doubled the additional yield on five-year French bonds relative to euro interest rate swaps.
Source: Financial Times Companies · Summarized by HeadlinesBriefing