Bank of America (BofA) has reversed its bearish stance on German government debt, now stating that the recent rally has more room to run and advising investors to buy Bunds.
According to BofA rates researchers, led by strategist Sphia Salim, the 25 basis point rally witnessed in Bunds over the past week is just the beginning. They believe that the decline in eurozone rates will continue and consider this as the opportune time to recommend a long Bund position outright.
The BofA team suggests purchasing the 10-year German Bund at a yield of 2.72% and predicts that the yield will drop to 2%. They advise exiting the trade if yields rebound above 3.1%.
On Thursday's European trading session, prior to the release of the U.S. CPI inflation report, the 10-year Bund yield remained steady at 2.732%. It is worth noting that on October 4, the benchmark yield hit a 12-year high of 3.02% due to concerns that a strong U.S. economy would lead the Federal Reserve to continue raising interest rates, resulting in higher yields for developed economies.
BofA explains that it formerly held a bearish bias towards Bunds, driven by worries about increased bond supply and hawkish positioning by the European Central Bank (ECB). The ECB's stance implied a continued rise in borrowing costs as part of its effort to suppress inflation in the eurozone.
"We argued that the selloff had room to extend due to higher core and semi-core supply, with positioning already long duration and data that had room to surprise," states BofA. However, the bank acknowledges that geopolitical events over the weekend have presented significant challenges to this bearish momentum. BofA believes that despite real money's likely long positioning, the current environment supports the accumulation of additional longs.
Risks to the Buy-the-Bund Trade
The buy-the-Bund trade is facing several risks that could impact its performance in the Eurozone. Bank of America (BofA) has identified these risks as positive surprises in Eurozone data, a reduction in long positioning by real money investors ahead of the first quarter European government bond issuance pick-up, and a renewed large selloff in U.S. treasuries.
U.K. Economy Shows Moderate Growth
In the U.K., the 10-year Gilt yield rose by 1.3 basis points to 4.351% following the release of data showing that the British economy grew by 0.2% in August compared to the previous month. Danni Hewson, head of financial analysis at AJ Bell, described this growth figure as the "Goldilocks of GDP growth." She explained that it is not too hot to suggest that the Bank of England needs to intervene to slow down the economy, nor too cold to indicate a complete stalling of economic progress.
Equities on the Rise
Across Europe, equities were experiencing a positive trend, influenced by Wall Street's projected fifth consecutive day of gains. The DAX in Frankfurt saw a rise of 0.7%, the CAC 40 in Paris increased by 0.5%, and London's FTSE 100 climbed by 0.8%.
Publicis Performs Well, easyJet Faces Challenges
Publicis, a Paris-based advertising group that owns prominent agencies including Saatchi & Saatchi, Leo Burnett, and Zenith, was a notable performer in the equity market. The company's shares surged nearly 5% after it announced positive results and raised its 2023 guidance for organic growth, profitability, and cash generation.
On the other hand, shares in easyJet, a U.K.-listed airline, declined by 4%. The airline's decision to restart dividend payments and purchase 150 new aircraft after a successful summer of flying did not resonate well with investors. Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown, acknowledged that easyJet's recovery from the pandemic is commendable, but she emphasized the need for more information on how the aircraft will be funded, suggesting the possibility of sale leasebacks as a less capital-intensive option.