Euro Area Bonds next Shoe to Drop, Vaccinations Accelerate

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April 29 Reuters Euro area government bonds have notched up their worst monthly performance against U.S. Treasuries in a year and investors are bracing for a bigger selloff over coming months as the pace of vaccination finally picks up across the bloc.

Tenyear U.S. Treasuries yield premium over equivalent German bonds, a gauge often used to measure differences in economic outlook, shrank in April by the most since last March. It fell as low as 179 bps, from the highest in more than a year at over 200 basis points in early April.

The divergence is partly down to a Treasury rally that knocked U.S. yields off 14month highs. But Bunds, with yields back to their highest since last March, have underperformed British, Australian and Japanese debt too.

Its almost like the shoe that dropped in the U.S. is about to drop in Europe, said Gerard Fitzpatrick, head of fixed income portfolio management at Russell Investments.

After a laggard start that dented the blocs economic outlook, vaccinations have gained pace in recent weeks. With supplies set to triple during this quarter, UBS economists predict 70 of the EU population will be vaccinated by September.

And major hurdles to fiscal stimulus are out of the way with Germanys constitutional court declining to block ratification of the EU recovery fund.

Craig Inches, head of rates and cash at Royal London Asset Management, is considering adding to a short position in Bunds, essentially positioning for a further selloff as…

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