LONDON: Euro zone government borrowing costs rose on Tuesday as a global flight from bond markets showed no sign of abating.
Analysts have struggled to explain the bond rout, blaming an uptick in inflation expectations as oil prices rose and unease about record-low yields. But with risk appetite compromised by the Greek debt crisis, the full picture is more complex.
In historical terms, inflation is still very low. Before data on April 29 showed unexpected growth in German prices, the market was looking for Bund yields to fall to zero, driven by the European Central Bank's 1 trillion-euro bond-buying programme.
A few sell orders then snowballed into a broad-based sell-off by investors unwilling to take large losses on what was previously considered a safe-haven asset.
When yields are close to zero, a market turnaround hurts more than it would have if the change came at higher levels. The current low coupons cannot compensate for the fall in prices.
Money flowed out of European bond funds for the first time in 2015 last week, data from research firm EPFR showed. The data covers 1,165 funds with $634 billion of assets under management.
"It's clear that the market hasn't stabilised. Before the sell-off started the common perception was one of low volatility," said Jan von Gerich, chief fixed income analyst at Nordea. "Now investors are more cautious, asking for a premium for the volatility we've seen recently."
Ten-year Bund yields were 7 basis points higher at 0.67 percent on Tuesday, having dipped as low 0.05 percent in mid-April.
The sell-off went global, as other markets adjusted for the higher yields on benchmark Bunds, which had become the fixed-income asset of choice. The proportion of euro zone debt carrying negative yields has fallen to a quarter from a third a month ago, according to Tradeweb data.
U.S. 10-year T-note yields touched their highest levels since December in early trades at over 2.30 percent. Japanese 10-year yields were a touch below their 2015 highs, trading above 0.45 percent.
Low market liquidity caused by central banks buying up bonds and regulations limiting market makers' ability to warehouse bonds are said to have exacerbated moves.
JPMorgan analysts estimated one investor could have traded 100 contracts of 30-year Bund futures in early 2014 without moving the market significantly. Now that number has fallen to 20 contracts. Thirty-year Bund futures have plunged about 26 points, or 2,600 ticks, in the past three weeks.
"It is very difficult to say what the trigger was, but once the yields started to increase, the whole market went bananas," said Jussi Hiljanen, chief fixed income strategist at SEB.
"The low liquidity, the one-sided positioning mean the end result is an uncontrolled rise in yields."
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