LONDON: Foreign investors have been selling long-dated euro zone bonds on a scale not seen in seven months, a sign of growing reluctance to hold debt with an ultra-low or negative yield.
Overseas holders sold a net 42 billion euros worth of long-dated government bonds in February, according to ECB balance of payments data.
Societe Generale head of fixed income and forex strategy Vincent Chaigneau blamed the change in sentiment on low yields.
"Once we got past the sovereign debt crisis in Europe, you saw quite a lot of inflows into euro government bonds from foreign investors," he said. "But that appeal has to a large extent vanished, especially as yields have continued to fall and in many cases turned negative."
The selling indicates investors are not heavily positioned for further bond gains, lowering the risk of a sell-off similar to that seen a year ago, when Bund yields jumped to above 1 percent from record lows of 0.05 percent within weeks.
"The positioning of foreign investors is probably much lighter, so the risk of a Bund-led sell-off like we had last year is limited," said Chaigneau.
However, analysts said foreign selling suggested an outperformance of German bonds against their U.S. peers might slow. Ten-year U.S. Treasuries yield 162 basis points more than 10-year Bunds, up from a February low of 142 bps.
It might also help weaken the euro, bringing relief to the European Central Bank, since a weaker currency lowers the cost of imports and helps stoke the inflation the central bank has been seeking to stimulate through quantitative easing.
JUST TOO LOW
First-quarter data from Lipper says investment funds sold euro zone government bonds worth 2.1 billion euros over a three-month period and 3.4 billion euros over six months.
"In general, what we are noticing is that lower-yielding investments are being challenged and that without the current QE programme (principally sovereign purchases) we probably would see an upturn in euro sovereign yields," said Nicolas Forest, global head of fixed income management at Candriam Investors Group.
Germany's 10-year government bond yield has crept up from a one-year low of 0.075 percent on April 11. But at 0.27 percent, it remains some 30 bps below where it ended 2015, pinned down by the ECB's 1.5 trillion-euro asset purchase programme.
German yields out to seven years are negative, meaning investors effectively pay to lend to Berlin.
Recent outflows from European bonds were driven by a recovery in risk appetite, ING head of investment grade debt strategy Padhraic Garvey said, and by interest in corporate debt in light of plans by the ECB to include top-rated, euro-denominated bonds from non-financial firms in its QE programme.
For others, there was a feeling of being squeezed out by the ECB.
"Some investors have cited the fact that with the ECB's large participation in the markets, there is a feeling that the markets are artificially inflated and they feel crowded out from investing in European government bonds," said Zoeb Sachee, head of European government bond trading at Citi.
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