How Investors Are Positioned In Volatile Bunds

It’s been a busy few weeks in eurozone bond markets.

The yield on 10-year German governments bonds, or Bunds, now trades at 0.67%, compared with a mid-April low of 0.05%. The yield, which rises as prices fall, spiked as high as 0.78% during a sharp selloff last week.

So what now?

Here is how some of the world’s largest bond investors are positioned:

BlackRock, $4.6 trillion of assets.

“If you asked us a month ago where yields would be now, I wouldn’t have expected quite such a quick and violent reaction,” said Michael Krautzberger, BlackRock’s head of euro fixed income. “But at least our portfolios were positioned the right way,” he said, adding that he was short duration. “We’d argue Bunds were very expensive before. We’d argue we’re approaching fair value [now],” he said. He noted there are “pockets of value” in eurozone bonds, such as long-dated Spanish bonds relative to long-dated German bonds.

J.P. Morgan Asset Management, $1.7 trillion of assets

“Bunds at 0.05% looked a bit expensive. They are now certainly more realistically priced… [particularly] in a world where the ECB is buying so many bonds and committed to do so until 2016,” says Nick Gartside, the firm’s chief investment officer for fixed income. Mr. Gartside says he is neutral on Bunds, having been underweight for a while. He is also betting Italian and Spanish bonds will tighten relative to Bunds.

Pimco, $1.6 trillion of assets

“It’s difficult to take a strong view on the Bund right now,” said Nicola Mai, a Pimco fund manager and the firm’s European macro expert. He said Pimco has been broadly neutral on bund duration – in other words, sensitivity to a back-up in rates -- for some time. He likes Spanish and Italian government bonds relative to Bunds. In general, he notes that corporate bonds are quite expensive, but there are areas of value such as in bank debt.

Allianz Global Investors, €197 billion of fixed income assets

“We stick to the view that QE is triggering a massive imbalance in euro government bond markets, and that the situation in Southern Europe is improving,” said Franck Dixmier, chief investment officer for European fixed income at the firm, referring to the fact that the ECB is expected to suck more bonds out the market than governments will issue over the QE period. Mr. Dixmier has been increasing his short position in eurozone bond markets (mainly in Germany). His portfolio now has a slight short bias in duration versus the benchmark index. He has also lightened up on bets that longer-dated bonds will fall relative to shorter-dated bonds, but remains overweight Southern European government debt.

Baring Asset Management, $60 billion of assets

“Short term the market has become over sold as positions have been unwound and liquidity poor," said Alan Wilde, head of fixed income. "Our preference is to retain exposure to peripheral eurozone bonds (Italy and Spain) expecting tighter spreads to Bunds over the summer as supply/demand factors are more favorable. Several countries have refinanced more than 50% of their maturing debt this year already.”

OppenheimerFunds, $240 billion of assets

"The rise in Bund yields was larger than anticipated," says Alessio de Longis, portfolio manager in the Global Multi-Asset Group at the firm. "In my opinion it was entirely positioning driven, and the catalyst was the gradual rise in oil prices which began two months ago. The disinflation/QE trades which dominated markets between June 2014 and March 2015 have gone through a sharp unwind, and Bunds were the last example of that, after the short oil, short euro and long European equities trades, which all unwound first."

"We have not been involved in Bunds given the unattractive returns compared to European equities, where instead we continue to hold an overweight exposure. However, I believe the above mentioned corrections of QE trades are coming to an end, and I expect Bunds to stabilize, European equities to outperform and the euro to resume its downtrend."

-- Chiara Albanese contributed to this post.

Update: OppenheimerFunds manages $240 billion in assets. An earlier version of this post incorrectly said it manages $25 billion in assets.