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Improving European forecasts overshadows the regional bond market

Improving European forecasts overshadows the regional bond market


Optimism over the recovery of the European coronavirus could cause problems for regional government bonds as some investors go beyond the top pessimism of the continent’s economy.

After walking the dirty markets together in the first stage of the pandemic in 2020, this year European and US government bonds have split.

The U.S. government’s worst balance sheet in decades in the first quarter has been as investors prepare for the economic upturn, with the eurozone government bond hit much lighter, with signs that vaccine delays, new social constraints and the European Central Bank are ready. to try to increase bond yields.

But now, some analysts say that improving economic data in Europe and announcing a faster regional integration program will outperform other government bonds, lay the groundwork for borrowing costs and push the euro against the dollar.

“It was a big surprise in the first quarter how quickly the U.S. reopened,” said Jim Caron, portfolio manager at Morgan Stanley Investment Management. “Once that surprise is fully appreciated, the market will start looking for the next big surprise. This surprise is the virus that promises where it comes from. All you have to ask yourself is when the data will improve next. It’s pretty obvious that it’s in Europe.”

The transatlantic bond yield yield reached 2 percentage points in mid-March, the largest spread between the U.S. Treasury and German Bunds since the February 2020 pandemic forced bond bonds together.

To a large extent, the stability of eurozone government bonds reached the ECB’s response. Fearing that the decline in US bonds would spill over into European markets, with borrowing costs accumulating in a delicate economic situation, the ECB boosted the pace of bond purchases in March.

But in addition, he left Europe slow with vaccines. In mid-February, the US delivered about 16 doses per 100 people, three times the proportion given to the EU population, according to data from the University of Oxford’s Our World in Data project.

Now, Europe is picking up the pace. Germany set the record 719,000 doses per day last week, and the block included 23 people for every 100 people. Recent economic data they have proven to be stronger.

Line diagram of the number of Covid-19 vaccines given daily per 100 people.  The pace of vaccination in the eurozone has increased.

“I agree with the top pessimism argument,” said Ella Hoxha, a portfolio manager at Pictet Asset Management. “The overall spread of vaccines in Europe is on the rise and it probably hasn’t had enough air time.”

Already, European government bonds are facing some selling pressures, as Germany’s 10-year yield has risen to its highest level since the end of February, at least 0.25 percent. Italian bonds are also among the weakest in a month, reaching a high of almost 0.79 percent on Thursday. The euro lost nearly 4 percent against the dollar in the first quarter, but regained ground in April.

The line chart against the euro dollar regains its upward strength after the fall

The case for a higher reception in the euro is based on the pace of vaccinations. Bank of America currency strategist Athanasios Vamvakidis said faster immunizations are already having an impact. To achieve these gains, “vaccines should be accelerated fast enough to save at least a portion of the summer tourist season…. That is feasible, but not given.”

Even in the best case of reopening, analysts do not expect to sell levels similar to the flight made by the Treasury earlier in the year. The purchase of ECB bonds continues to outpace growth in growth, and inflation expectations in Europe are set.

“European government bonds are likely to work better. There is no realistic result of high inflation in Europe. It’s very, very hard to imagine one, ”said April LaRusse, chief investment officer at Insight Investment.

Reopening can set traps for the ECB if the market tries to return to normal. “They need to navigate this time when we’re starting to see an increase in optimism and rate volatility,” Hoxhak told Pictet.

The central bank meets next week. “There will be a communication challenge for the ECB,” said David Riley, chief investment strategist at BlueBay Asset Management. “Some market participants will perceive that the subsidy is on the way.”



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