Europe's debt erases $160 bn on path to record weekly loss

ECB's euro 1.1-trn QE programme gives cause to avoid the region's government bonds

Investors revolting against negative yields in Europe wiped euro 142 billion ($160 billion) off the value of the region's government bonds this week, heading for the biggest selloff since at least October 1993.

With Bill Gross and DoubleLine Capital's Jeffrey Gundlach among investors saying its time to sell bunds, the value of European bonds dropped to euro 5.75 trillion Thursday, the least since March 4, Bank of America Merrill Lynch data show. Germany's 10-year yields completed their biggest two-day climb since November 2011 as signs of euro-area inflation prompted traders to pare bets the European Central Bank's quantitative easing will drive up prices on the continent's benchmark debt.

"Yields had gotten to levels where any investor who had discretion around where they want to put their money would not want to own these bonds as a long-term proposition," said Peter Jolly, the Sydney-based head of market research at National Australia Bank Ltd, the nation's largest lender by assets. "It was always unreasonable to my mind that, just because the ECB was buying bonds, that yields had to be jammed to the floor."

German 10-year yields surged 20 basis points, or 0.2 percentage point, in two days to close at 0.37 per cent on Thursday. That's up from an unprecedented 0.049 per cent reached April 17.

The ECB's euro 1.1-trillion quantitative-easing programme gives cause to avoid the region's government bonds, said Steven Wieting, global chief investment strategist in New York at Citigroup Inc's private bank. Wieting said on April 29 the bank cut allocation to German bunds in favour of US Treasuries in the five- to seven-year range.

"There is no reason to accept negative yields for the same reasons that institutional investors might," said Wieting, whose funds hold a smaller amount of bunds than indexes recommend. Since his bank advises some of the world's most affluent families, with assets that total $374 billion, Wieting isn't required to hold easy-to-trade sovereign debt.

"Private-wealth clients don't need to follow that particular herd."

Wieting said the effect of quantitative easing in Europe can be seen by looking at the US experience of the past four years, when record stimulus boosted stocks and corporate bonds and made government bonds more expensive.

The Bank of America Merrill Lynch's Euro Government Index peaked at euro 5.93 trillion in market value on April 15, up from euro 5.55 trillion at the end of 2014. "The market got too set on the idea that German bund yields would go to zero based on ECB buying," said Roger Bridges, Nikko Asset Management Australia's chief global strategist for interest rates and currencies in Sydney. "I think we got to levels where people were saying the risk-return is not here."

Gross, who ran the world's largest bond fund until last year, called the 10-year German bund the "short of a lifetime" last week. Gundlach said Tuesday he's considering making an amplified bet against the bonds to join a growing group of top money managers wagering against the debt.

Growth in euro-area M3 money supply, which policy makers see as a gauge of the underlying strength in economic activity, averaged an annual 4.1 per cent in the first quarter, the fastest pace since 2009, according to ECB data published Wednesday.

The annualized inflation rate in Germany quickened to 0.3 percent in April from 0.1 percent the previous month, according to European Union-harmonized data published by the Federal Statistics Office in Wiesbaden on Wednesday.

"Our outlook for Europe is generally one of reflation," Citigroup's Wieting said. Investors should avoid being lenders in Europe's public debt markets, he said. "You can go there to borrow."