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 Around a third of all outstanding euro zone sovereign paper offered
negative yields last month, prompting some investors to quit trades
that have effectively forced them to pay governments for the
privilege of lending to them long-term.
The sell-off in German sovereign debt - traditionally a safe haven -
was particularly sharp.
But portfolio managers expect continued European Central Bank (ECB)
purchases of sovereign paper - the cornerstone of Governor Mario
Draghi's plan to revive to stimulate the euro zone economy - to
stabilize things.
The recent sell-off, said Chris Iggo at AXA Investment Managers,
"was a collective realization that negative bond yields just don't
make any sense and that, save for some economic catastrophe,
interest rates will rise over the medium term."
"It is likely that we have seen the lows," said Iggo, who is the
chief investment officer for bonds.
Government bonds are a key part of pension fund portfolios because
they are viewed as an I.O.U that will be paid on time and in full.
For this reason, most pension funds prefer to hold on to their
sovereign paper for the long haul.
Bonds account for nearly a third of the $33 trillion of assets owned
in the world's major pension markets, according to a recent study by
consultancy Towers Watson. In Britain, more than a quarter of
pension funds were made up of government bonds in 2014.
HEDGE FUNDS HURT
Hedge funds or other actively managed funds which make money by
trading in and out of bonds priced on secondary markets have had to
move swiftly to deal with the recent bond market rout.
CTAs, hedge funds that use mathematical models to bet on long
running market trends, suffered in April because they had bet on
further rises in bond markets. Data from industry tracker
Eurekahedge showed CTAs lost on average 1.7 percent in April.
"As the trend reversal occurred, they struggled," said Philippe
Ferreira, head of research at Lyxor Asset Management.
Some of the biggest hedge fund losers in April were Cantab Capital
Partners Quantitative Fund, down 9 percent and ISAM Systematic Fund,
down 6 percent, according to data seen by Reuters.
Cantab declined to comment. ISAM did not respond to requests for
comment.
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STABILIZING
However by Friday benchmark 10-year German sovereign debt had
snapped a 9 day losing streak with its yield falling 7 basis points
after rising nearly 0.80 percent on Thursday. Bond prices rise when
their yields fall.
Many investors think German debt is still priced too high but they
say the ECB's 1 trillion-euro quantitative easing program, which is
heavily reliant on purchases of German government debt, will keep
prices up until Sept. 2016 at least.
"I wouldn’t bet a single euro on the ECB tapering its program," said
Franck Dixmier, Chief Investment Officer of Allianz Global
Investors' 171 billion euro European fixed income business.
"Draghi was quite clear in his last press conference that what
really matters is looking beyond headline numbers and assessing
genuine medium to long term economic developments. The ECB is far
from achieving its ultimate objectives of real price stability and
inflation of around 2 percent."
As a result, few money managers are making long-term material
changes to their portfolios or strategies which assume that European
government debt prices are still in the last stages of a 20-year
bull run.
A surge in the amount of cash seen flowing into the market in July
is also expected to support pricing, investors say.
"We will see a huge negative net supply in July -- around 120
billion euros -- and that will bring relief to prices of euro zone
government debt," Dixmier said.
(Additional reporting by Nishant Kumar; Writing by Carmel Crimmins;
Editing by Sophie Walker)
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