The rebound in European government bond yields after the initial shock of Brexit, at first seems a natural reflection of an improving economic outlook and the market’s tacit acceptance of the European Central Bank’s amended quantitative easing programme.
But, recent data indicates that there is a scarcity problem in the European government bond market, which runs counterintuitive to the fall in prices, argued Allenspach.
“What is disturbing is the reported scarcity of bonds, which normally results in a price increase, not a decline,” he stressed.
“According to data collected by Bloomberg, the fees to borrow German and French government bonds have widened materially in recent weeks, with fees in year-end trading up to 6%. From the point of view of a trader, this is a very stark sign of scarcity of government bonds. It should be kept in mind that the ECB is only lending out EUR 50 billion of the bonds it has in its portfolio against cash, while a big part of the bonds “rests in its vaults”.
Allenspach interprets this curious reaction from the market as a sign the ECB must scale back its purchases sooner rather than later.
“We all remember ECB President Draghi saying that the ECB has sufficient material at hand to continue its purchases as long as needed. Obviously, the market has a different view on this.”
