More than a few commentators have drawn comparisons between this week’s near doubling of bund yields and the (in)famous bund tantrum of 2015.
To be sure, the move is notable – although a few traders seem intent on dismissing it as more “one small step for bunds” and less “one giant leap for DM yields kind”:
So argue as you will about the implications and about the extent to which positioning and technical factors will or won’t exacerbate things, but the simple math suggests the move we’ve seen this week is on par with tantrum-like episodes.
As BofAML notes, Tuesday’s move was a four-standard deviation event putting it “on par with the December 2015 rate cut disappointment, Q2 2015’s Bund tantrum, and the 2013 US taper tantrum”:
Now here’s BofAML to explain why this “tantrum” wasn’t really a “tantrum”…
More differences than similarities to 2013 and 2015 taper tantrums
The main difference between where we are today and where we were in previous tantrum episodes is positioning. Positioning today is much cleaner as evidenced by a number of metrics:
Our FX and Rates Sentiment Survey points to an aggregate short duration position across core and periphery compared to an aggressive long in 2015. Bund price action has not been conducive to heavy long CTA positioning, with Bunds in a 20-50 bp trading range since the beginning of the year. Finally, payer skews had been cheapening back in Q1 2015, and along with the build-up in positioning prompted us to recommend buying payers ahead of the tantrum.
Additionally, unlike what absolute levels of implied vol suggest, the market actually seems more cautious about the likelihood of rates repricing than in 2013/2015, with the ratios of implieds relative to delivered vols still higher.
We therefore view Tuesday’s price action as being a level repricing. On the one hand, Draghi’s attempts at finding an economic rationale for December’s tapering decision, has reduced hope for the ECB prolonging QE by abandoning the capital key or the 33% limit. By curtailing the “easing” tail of the distribution of monetary policy, median rate expectations will mechanically move higher, even if the mode remains unchanged.
On the other hand, the richening of the payer skew suggests that the market was looking for higher rates and ways to fade the rally towards the bottom of the 2017 trading range that seemed in contradiction to market friendly outcomes in the French election and the Italian early election speculation.
Finally, the flattening of the long-end of the curve is in stark contrast to the pronounced steepening seen in 2015. In our view this reflects the attractive level of forward rates implied by a very steep curve. Like in 2015, long-dated forwards in both Bunds and swaps are at levels where even the German LDI community can buy the market and break even relative to where they are printing new business. As such we reiterate our view that a Bund ‘tantrum’ would be limited to a recorrelation of term premia to the Bundesbank’s QE purchases, and for a move beyond our 50 bp target for Bunds requires a more aggressive repricing of ECB rate expectations.