Demand for bund drops

Latest research y Citi reveals that investors are shunning the safety of bund. While it is not surprising to see investors' lack of appetite towards Euro Zone bonds, since European Central Bank (ECB) shied away from further big size easing in December.

What surprising is that bund accounted for most of the outflow in Euro Zone bonds. Surprising investors picked up Italian bonds.

It is probably due to the lessons learned last year, when bund yield rose sharply after ECB bond buying commenced. Ex Pimco chief Bill Gross earned quite a name calling the drop in bund prices. 10 year bund yield rose above 1%, which pushed Euro against Dollar to as high as 1.17 from 1.05 few months ago. For the past two weeks there has been large outflow in bunds, not seen in a year.

Due to prevalence of hawks in ECB governing council investors now expect ECB to stay put at least first half of the year. As of now, 10 year bund yield is hovering around 0.5%-0.6% range, however as ECB's inaction, despite slowdown in China becomes clear, bund yield could once again move above 1%.

We at FxWirePro, expect Euro to rise against Dollar and to reach as high as 1.15 by middle of the year.