Scaling Back
Rock-bottom consumer price growth -- exacerbated by a slump in oil prices -- offers some comfort to investors who argue that in 'real' terms these low yields are justifiable.
But there are signs crude may be on the rebound. Prices are set for their biggest weekly gain since the start of February, with fighting in Yemen potentially sowing the seeds of further widespread conflict in the Middle East.
The euro zone will report preliminary flash inflation data next week, which some analysts said should bolster expectations it is fending off a deflationary spiral.
Some in the market are already cutting their bond exposure in anticipation of a reversal in the rally.
"We have entered a short position in Bund futures and we've also gone slightly short on peripheral government debt, mainly because we don't see any more room for spread compression either in Bunds or peripheral govvies with valuations looking relatively stretched," said Garrett Walsh, head of credit research, Europe, at Pioneer Investments, which manages assets worth about $238 billion.
"In addition to that, we have gone long breakeven inflation through swaps and through bonds, mainly to position for the reflation trade that we start to see happening."
Exit Strategy
With the ECB buying up bonds at a rate of 60 billion euros a month, and investors looking to reinvest a raft of coupon repayments and bond redemptions that fall due next week, some analysts expect yields to fall even further. This demand squeeze could be particularly felt in German debt.
"Central banks buying a big chunk of that could make those valuations stay away from fundamentals for some time," said Antonio Torralba, head of flow rates trading at BBVA.
Signs of price distortion in secured lending markets have also fueled concerns QE is creating a scarcity of bonds.