Bonds rose across Europe, rounding out a roller-coaster week that saw volatility in German debt surge to an almost three-year high and Spanish and Italian 10-year yields top 2 percent for the first time in 2015.
German bunds snapped an eight-day slide after U.S. jobs data trailed economist forecasts, while a jump in yields earlier in the week lured buyers to the debt of Spain and Italy. Strategists said the market gyrations were partly the result of the European Central Bank’s bond-purchase program, which has reduced the amount of securities in circulation.
“The European bond market has been through a volatile week where a shift in sentiment led to capitulation of long positions in an overcrowded market,” said John Stopford, head of fixed income at Investec Asset Management in London. “Fundamentals suggest bond yields here have room to fall because of the ECB’s quantitative easing, but the squeeze may have further to go.”
A long position is a bet an asset’s price will rise.
Germany’s 10-year bund yield fell four basis points, or 0.04 percentage point, to 0.55 percent as of 5:18 p.m. London time. The 0.5 percent security due in February 2025 rose 0.405, or 4.05 euros per 1,000-euro ($1,123) face amount, to 99.56.
Bunds still posted a third weekly decline after the yield on the benchmark euro-zone securities climbed on Thursday to 0.78 percent, the highest since Dec. 8. The yield increased 17 basis points from last week.
Italian bond yields dropped nine basis points Friday to 1.68 percent, leaving them 18 basis points higher than on April 30, while those on similar-maturity Spanish bonds fell seven basis points to 1.68 percent, up 21 basis points on the week.
The ECB’s 1.1 trillion-euro QE program sent euro-region bond yields tumbling to record lows earlier this year, in some cases below zero.
Signs of an improvement in Europe’s economy and a retreat from deflation have encouraged investors to question whether the Frankfurt-based central bank will keep going with the bond purchases through September 2016 as planned.
That’s weighed on prices, as has investor skepticism about the sustainability of record-low yields. The European Commission raised its 2015 economic growth forecast on Tuesday to 1.5 percent, from a prediction of 1.3 percent in February.
Adding to the risks of holding bonds, implied options volatility on German 10-year bund futures contracts surged in the past week to the highest since August 2012, data compiled by Bloomberg show.
Greece’s failure to come to terms with its international creditors was one more development contributing to the week’s volatility. Across the Atlantic, the Labor Department data showed U.S. employers added 223,000 jobs in April, following a revised 85,000 gain in March, the smallest since June 2012. Economists surveyed by Bloomberg predicted a reading of 228,000.
“We clearly had a very bullish trend in the bond market and it came to an abrupt end,” said Allan von Mehren, chief analyst at Danske Bank A/S in Copenhagen. “The market had become very overbought and very stretched and sometimes it doesn’t take a whole lot to lead to a correction. The extent of the move has been related to very poor liquidity in the market.”