European sovereign bonds led a global rout, with markets bracing for the kind of supply surge not seen for years, after nations unveiled spending plans of more than $1 trillion to fight the coronavirus crisis.
Dramatic jumps in yields amounted to a wide and deep repricing of the market, with investors selling debt across the board. Italian 10-year yields jumped as much as 64 basis points, before easing marginally on speculation the European Central Bank is buying the nation’s debt.
Rates on German 30-year debt surged to pop back above 0%, and those on 10-year U.S. Treasuries extended their advance during London trading after clocking up the biggest jump since 1982 on Tuesday.
At the same time, there was sustained demand for the dollar, with the Bloomberg index tracking the world’s reserve currency up for a seventh straight session, its longest rising streak since November. The premium for getting hold of the greenback in funding markets eased after euro-area banks took $112 billion made available by the U.S. Federal Reserve on Wednesday in operations coordinated by the ECB.
Some $1.14 trillion in fiscal support has been pledged or is under consideration as governments around the world rush to contain the coronavirus and shore up financial markets and businesses. Pledges by Germany and France to guarantee hundreds of billions in bank loans boosted the global tally.
“Given the massive fiscal stimulus, rates have to go,” said Jens Peter Sorensen, chief analyst at Danske Bank A/S. “It goes for Treasuries, BTPs, bunds, Spain, France, you name it.”
While it isn’t surprising that the debt of nations deemed more vulnerable to the outbreak have taken a hit, it’s striking that bond spreads are widening when even the benchmark -- German yields -- is rising. Bund yields rose for a seventh day in a sell-off reminiscent of the 2015 “tantrum.”
“This is hard to rationalize given one would tend to think that risk aversion should operate as a zero-sum game wherein safe havens such as bunds are the beneficiaries,” Rabobank strategists including Richard McGuire wrote in a note. “Investors appear to be pricing in a sizable budgetary deterioration throughout the euro area.”
Rabobank noted that even in previous times of trouble, such as the dot-com bubble and the euro-zone crisis, bunds rallied due to the consequential haven demand -- unlike now.
“It potentially speaks to the gravity of the situation prompting investors to take a much more narrow definition of what is safe,” the strategists said, adding poor liquidity could also be interfering with the market’s signals.