Bill Gross Cuts No Ice in Europe"s Parallel Universe

If you want to know why bondageddon hasn't hit Europe yet, look at the euro.

Sure, German bunds lost ground this week amid talk from Bill Gross and other market luminaries that the end is here for fixed income -- an auction for a new benchmark had a mixed result. But investors should really be watching trading in the real benchmark, the 0.5 percent security due Aug. 15, 2027. The yield rose 8 basis points to 0.51 percent, and it is still within the range of the past year. 

Old Benchmarks Tell No Lies

The €25 billion German 10-year hasn't collapsed at the sight of Bill Gross

Source: Bloomberg

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Investor demand in Europe has not been spooked by talk of the end of the great bull market for U.S. bonds yet. Dormant inflation continues to shield the region's fixed income assets from the ravages of higher yields elsewhere. When and if that changes is all down to the the outlook for CPI.

One Currency to Rule Them All

The ECB's hawkish minutes drove the euro higher, bolstering support for European bonds

Intraday times are displayed in ET.

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The European Central Bank's minutes of its December policy decision, published Thursday, revealed a hawkish tone on future guidance that pushed up the common currency versus the dollar. 

This will limit the impact of higher U.S. Treasury yields, and helps to explain why the European government bond market has handled a heavy week for supply well. Both Italy and Portugal saw huge demand for their long-end syndicated sales, and yields for both have since fallen.

€70 Billion Frenzy

These were some of the favorite deals in a record week for new bond sales in Europe

Source: Bloomberg

Cover=order book divided by deal size. Bloomberg records on weekly issuance start in 2014.

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As usual in Europe it is all about inflation -- or more accurately, the lack of it. The ECB has struggled for the past decade with price gains coming in well below its target of just below 2 percent, and a strengthening euro is a major impediment to breathing animal spirits back into the economy. 

This Is Where It's At (For Bonds)

The ECB is hardly predicting runaway inflation, so there's no reason for fixed income to panic

Source: Bloomberg

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Central bank President Mario Draghi may have declared victory over deflation last month, but the currency's persistent strength muddies the waters for the governing council. For instance, Bank of America Corp's Merrill Lynch analysts have just lowered their euro area 2018 core inflation forecast to 1.1 percent. The hawks haven't won the debate yet.

While European economies are recovering, until inflation returns to the ECB's goal the debate on ending QE remains open. It's too soon to rule out that bond purchases get extended beyond September, even if at a reduced pace.

For all the talk of the end of days, German yields are still negative out to five year maturities. The non-stop party for European bonds continues. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Marcus Ashworth in London at [email protected]

To contact the editor responsible for this story:
Jennifer Ryan at [email protected]