Last Year's Biggest Bund Bull Looks to Retain Title in 2018

(Bloomberg) -- Last year's biggest bund bull is looking to carry its mantle into 2018.

While the median forecast for the German 10-year yield is 0.85 percent by year-end as the European Central Bank debates an end to bond buying, Mizuho International Plc predicts it will be little changed at 0.45 percent, lower than any other estimate surveyed by Bloomberg. Before then, however, it estimates yields will fall to as low as 0.2 percent by March.

That's because it expects the stock of bunds held by the ECB in its asset-purchase program to continue to depress yields even as policy makers reduce the pace of monthly bond buying, while low inflation will delay any interest-rate increases. Even if expectations for tighter policy grow, questions about the sustainability of peripheral euro-area debt may keep bunds insulated as bond investors favor havens such as Germany.

“The outlook for core rates in 2018 is more subdued than the market is pricing,” Mizuho rates strategist Antoine Bouvet said in emailed comments. “Peripheral countries should be more materially affected by tightening of financial conditions, which should transfer some demand from periphery to core.”

In July, Mizuho reiterated a forecast that bund yields would be at 0.2 percent by the end of 2017, the lowest of any of the 34 analysts surveyed by Bloomberg at the time. That compared with their eventual finish of 0.43 percent, below the 0.7 percent median estimate in the poll. 

Money markets are now pricing in the first ECB interest-rate hike since 2011 in early 2019, with focus on whether officials will alter their forward guidance in the coming months. European bonds dropped Tuesday, on the back of comments from policy maker Benoit Coeure that the current extension of quantitative easing may be the last. They pared some of those losses Wednesday, even as his colleague Ewald Nowotny reiterated the message, saying that an end to the asset-purchase program was “within sight.”

The yield on German 10-year bunds fell one basis point to 0.45 percent as of 9:12 a.m. in London, after climbing 22 basis points in 2017.

To contact the reporter on this story: John Ainger in London at jainger@bloomberg.net.

To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Scott Hamilton, Keith Jenkins

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