Last updated: 13:08 / Thursday, 14 May 2015
Analysis by NN IP

From a Valuation Perspectives Bunds Remain Unattractive at Current Yield Levels

From a Valuation Perspectives Bunds Remain Unattractive at Current Yield Levels

German 10 year Bund yields reached a low of 0.07% on the 20th of April. A rise followed in the remaining of the month. The 10 year yield reached a level of 0.58% on the 6th of May, up 51bp from the low. 30 year Bund yields rose 68bp over the same period. Pieter Jansen, senior Multi-Asset Strategist at NN Investment Partners analizes if this is a overshoot or trend reversal in german fix income.

Also the US 10 year yield rose (+33bp since 20th of April). However, it is clear from the graph below that given the significantly lower level of Bund yields in a relative sense the Bund yield correction is very significant indeed, said Jansen. Measured as 20 day yield volatility as a ratio of the yield level the move is beyond any correction in Bunds seen in the past decades.

Along with Bunds also other European government bond yields rose. Periphery spreads were under pressure earlier in April due to Greek related stress, but during the Bund yield correction Periphery spreads declined once again.

What drove this correction?

The increase in yields does not seem to be driven by fundamental data flow. Global macro data surprises were at best mixed during the past month (US data surprises were negative and the positive growth surprise trend in Euro Area data seems to be stabilizing somewhat). Indications of an early QE exit by the ECB could have the potential to trigger a correction like this, but also this was not the case and the ECB remains dovish. "It is possible that fading Greek related stress and a disappointing Bund auction may have contributed to a rise in yields, but in isolation it seems that it is hard to justify the significant move we have seen", point out Jansen. Therefore, it is most likely that technical and/or positioning factors played an important role. Surveys had indicated that on average investors were significantly overweight in Bund for instance. This can be seen in the graph below:


Most of the rise we have seen in German Bund yields was a result of the rise of the real yield, believes NN Investment Partners´expert. It is no surprise that it is this component that is showing the strongest correction. Of the 51bp rise of German Bund yields since the 20th of April, 42 stem from a pickup in the real component. The inflation expectations component has been trending up for longer, which coincided with a rise of the oil price. Probably part of the rise is also a result of currency weakening and ECB policy.

Overshoot or trend reversal?

After such a sizeable correction that is not obviously the result of macro data flow and/or a significant directional change in the monetary policy outlook "it seems that part of the move is an overshoot, although at this stage there are no signs yet of a stabilization after this significant move. Even though the overshoot may be relevant for the very short‐term, from a valuation perspectives Bunds (and other core government bonds) remain unattractive at current yield levels. The real yield remains significantly negative", concluded Jansen.