A Warning on the Rally in Europe Bonds, ETFs | ETF Trends

The run-up in Eurozone debt and bonds-related exchange traded funds could begin to flag as BlueBay and BlackRock sound a warning on a continued rally in Europe’s fixed-income market.

With investors clamoring for income opportunities, bonds yields of Ireland, Italy and Spain have been significantly pushed down. For instance, Italian 30-year yeilds fell below 4% for the first time since 2006, Portugal’s spread over German bunds narrowed to a four-year low, Bloomberg reports.

BlueBay warned that the rally in Eurozone bonds is being fueled by an overly optimistic outlook that the European Central Bank will begin quantitative easing.

“Markets have clearly moved to expect a rate cut as a minimum at the June meeting,” Mark Dowding, a money manager at BlueBay, said in the article. “The burden of proof is in the data and Draghi may find it difficult to deliver in June. The market is getting ahead of itself. The sense in the periphery is that we’ve now seen the vast majority of the spread tightening that we’re looking for.”

Scott Thiel, head of European and global bonds at BlackRock’s London branch, also cautioned that the ECB is unlikely extend stimulus measures.

“In the European periphery we remain invested in Portuguese and Slovenian government bonds,” Thiel said in a note. “However, given their significant spread compression to German bund yields in recent weeks and in light of excessive market expectations for imminent quantitative easing in the euro zone, we have reduced these positions.”