Bunds are back in the drivers seat
German bond buyers were hoping from a lifeline from Draghi but he maintained the status quo. That squeeze that started yesterday is now back with a fury. 10-year yields are up 17 basis points to 0.88% after a similar move yesterday.
The long side of this trade (ie lower yields) was a very crowded trade and it was often done by foreigners who hedge the currency risk via euro shorts. As the entire trade is squeezed out, they're forced to sell Bunds and buy euros.
The ECB is buying bonds and that will limit the fall in bunds but it might not be as much as hoped. Spread trades dominate the landscape and because the move in Bunds is far outpacing Treasuries (10s up 11 bps) and periphery bonds (Spain 10s up 5 bps), those are getting crunched. When the ECB buys it will push them down more-or-less uniformly and that doesn't help bunds (although it should hurt the euro).
In any case, the big question is where the bund rout will stop. DoubleLine Bond King Jeff Gundlach says he sees bund yields rising an additional 125 bps. That's a big move but looking at the chart, the obvious target now is around 1%, which is psychological as well as the 50% retracement of the move since 2014.
In any case, these moves point to an extension of recent euro gains. That said, I think it's gone too far too fast. According to Predicted Markets, EUR/USD has rallied more over the last 2 sessions (a total of 3.4%) than in any 2 day period since 19/20 March 2009. That's 324 weeks ago.
