Bunds ‘at risk of taper tantrum’ if ECB tapers – WisdomTree

The European Central Bank (ECB) could spark a taper tantrum later this week which could send yields on German bunds soaring from near record lows, according to WisdomTree in Europe.
While the ECB – headed by Mario Draghi – has been buying bonds since 2015, having already embarked on an aggressive rate cutting strategy earlier in the decade to stave off the real threat of deflation and help economies recover from recessions, the expectation now is that the programme could finally be called to a halt.
Viktor Nossek, head of research at WisdomTree, said fixed income investors in Europe holding securities such as bunds should brace themselves for potential losses if the ECB makes any statements around the levels of support it currently gives to markets.
“The mere suggestion that the programme across Europe is finite will catch investors off guard, and could spark Europe’s own taper tantrum, with bunds firmly in the firing line,” Nossek said.
“With rates on bunds as low as they are currently – under 0.5% for ten-year bunds – investors who are holding these bonds could be at risk of significant losses.”
The move upwards could be akin to the taper tantrum of 2013 when the Federal Reserve chairman of the day, Ben Bernanke, sparked a series of sell-offs around the world – and set in motion a reversal of direction for US treasury yields – after first mentioning the possible curtailment of artificial stimulus.
As the chart below shows, US treasury yields soared as much as 100 basis points over the next three months after Bernanke first mentioned tapering.

Nossek said bunds could well mimic treasuries depending on the comments from the ECB this week.
“With growth in Europe more stable, and inflation positive – while albeit remaining weak – the ECB may well use this week’s meeting to signal that the recovery is now more self-sustaining, in which case bund yields could follow the same path as US treasuries did in 2013,” Nossek said.
With such an event possible, Nossek added investors may consider going short bunds in the current environment.
“We have already seen some speculative moves in bund yields, but any hint of tapering from the ECB will put Eurozone bond markets in a tailspin,” he said.
“Therefore now could be the time for investors to consider shorting these bunds, especially with yields so close to record lows.”