The temptation to convert paper profits
Shah: To stick or twist on bonds?
In contrast to the mixed price action on equities the bond market complex has offered investors phenomenal returns this year. The eurozone bond markets in particular have seen double digit gains with the periphery of Italy, Spain and Portugal leading the way.
But things are looking less appealing as Greek yields rise sharply, while Spain opted to allot less than the maximum €3.5bn at today’s BONO sale despite having total bids of €4.9bn.
These are events that we have not seen for a long time, and while we are far from the bad old days things have a habit of deteriorating very fast. The 10y yields on Spain and Italy are already up around 25bp on the day while Portugal and Ireland are up by 20bp with Greece seeing yields 90bp higher.
This comes at a time when bunds remain in demand and the yield is down a further 3bp today.
So the question is whether to watch paper profits deteriorate or take some of the chips off the table… just in case things deteriorate further. We have seen how in the equity complex sentiment went from this is another “buy-on-dips” moment to starting to worry about more significant downside.
The probability of full blown QE might be rising, but this won’t be until after the AQR/stress tests and the Dec TLTRO and is a theme that is more likely to be a focus for the new year.