Eurozone inflation fears hit high grade credit and gov't bonds

Added 31st October 2016

Eurozone investment grade and government bonds continued to see outflows as inflation expectations rose, according to Bank of America Merrill Lynch research.

Eurozone inflation fears hit high grade credit and gov't bonds

Investors in European fixed income are beginning to lend credence to the latest inflation projections released by the European Commission. Last week, the EC’s statistics showed that the euro area annual inflation was 0.4% in September, up from 0.2% in August.

And at the back end of last week, Germany posted its highest level of inflation in two years, with prices rising 0.7%.

BAML’s data reflected this change in investor sentiment, with high grade funds seeing their third week of outflows. According to the bank, this represents the longest streak of outflows the asset class has seen since February, although, it notes the latest outflow was marginal.

Government bonds also experienced their third consecutive week of outflows, following a higher repricing of rates last week, the findings revealed.

Duration cut 

The report also indicated that the recent move in the rates market has prompted investors to slash duration. High-grade investors still preferred the front-end of the curve, BAML said, resulting in inflows for both short-term and mid-term funds. Funds on the long-end of the curve, meanwhile, saw their sixth consecutive week of outflows.

However, investors’ growing concerns around rising inflation has not put a damper on sentiment overall. 

Data released by the European Commission last Friday showed economic sentiment (ES) had improved both in the euro area and the European Union. Of the largest eurozone economies, the ES index rose the highest in Spain (+2.6), Germany (+1.6), Italy (+1.5) and the Netherlands (+1.0).

Perhaps unsurprisingly, flows for riskier European assets tended to be positive over the period. High yield recorded its fifth week of positive flows, while outflows from equities appeared to be halting somewhat.

European equity funds saw their smallest outflow in 35 weeks, but nevertheless reported their 38th consecutive week of redemptions.

Emerging markets global debt and commodities also proved popular, garnering positive flows for the seventeenth and second week in a row, respectively.

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