A massive selloff in German bunds, which one firm dubs “bundsplosion,” is spreading to the stock market as investors fear a sharp rise in borrowing costs will change the investing equation.
For the third straight day, the 10-year German government bond suffered a massive selloff, pushing yields, which move in the opposite direction, up sharply. At its high point today, the 10-year bund yielded 1.001%, according to Dow Jones, which is more than double its yield of 0.492% since Friday’s close. But the yield stabilized to around 0.908% some two hours before the opening bell on Wall Street.
The chart (left) below of the 10-year German bond shows a one-year picture and the recent spike in yields. The chart on the right is of today’s trading action and shows the rise above 1% for the first time since last fall. The bund, which nearly turned negative in late April when its yield tumbled to 0.051%, is losing its safe haven status as data picks up.
The bond selloff in Germany spread to the U.S. fixed-income market for a second straight day, with the 10-year Treasury note climbing above 2.4% in pre-market trading, a fresh seven-month high. Stock markets in Europe were also under pressure, with shares in Germany down 1.3%, albeit off their lows. U.S. shares were lower in pre-market trading, with the Dow Jones industrial average down 92 points, or 0.5%.
“The global bond sell-off continues,” Sreekala Kochugovindan of Barclays told clients in an early-morning research note.
The sharp spike in yields has been driven by improving economic data in the eurozone. The bond market selloff was exacerbated yesterday by comments from European Central Bank chief Mario Draghi, who warned investors that bond market volatility would rise, adding that investors would have to deal with it. At the end of the ECB’s meeting yesterday, Draghi said the ECB’s bond-buying program would still continue through September 2016, despite signs that inflation is rebounding and the economy there is perking up. Inflation, of course, is the enemy of bonds, as it eats away at the interest bonds pay out.
“The 10-year Treasury yield hit a 2015 high earlier today, following the lead of its German counterpart after ECB President Mario Draghi on Wednesday offered an upwardly revised forecast for eurozone inflation,” Josh Selway, an analyst at Schaeffer’s Investment Research told clients in a note before today’s opening bell.
Bonds had been rallying on the ECB’s aggressive bond-buying program, known as quantitative easing, or QE. But now that trade is unwinding.
What’s rattling investors is the size of the move in such a short time frame. Bespoke Investment Group said in a report this morning the massive move was off the charts, and from a probability standpoint is akin to an event that should occur once every 2.6 million years — not in a two- or three-day span.
“The moves (Wednesday) were almost 6 standard deviations, an event which under a normal distribution seen flipping a coin would occur once every 2.55 million years,” Bespoke told clients in a note. “While the ‘bundsplosion’ in yields driven by strong Eurozone economic data, positioning, and an ECB that declined to bail out fixed income longs hasn’t roiled equity markets over the last two days, it has rippled into fixed income markets around the word.”
Higher borrowing costs and interest rates, of course, hurt economic growth, corporate profitability and make stocks less attractive relative to bonds.