Sell-off in euro bund is unlikely

Since the beginning of 2015 the economic outlook in the euro area has been improving gradually.

According to Barclays, there has not been a significant sustainable shift to qualify the recent sell-off as fundamental.

 Indeed, the breakeven inflation expectations for 2016 and 2017 are far below the ECB's projections, and GDP expectations for the next two years have changed little. 

Barclays observes the following factors to be prevailed in the market.

• 1) term premium should remain in negative territory over the coming months, helped by large bond purchases by global DM central banks (ECB, BoJ)
  
  
• 2) inflation risk remains low
  
  
• 3) Greece is unlikely to be resolved sustainable in the near term, and this issue is likely to remain a background noise

Based on the above expectation, Barclays says "We are constructive on bunds at these levels and expect 10y bund yields to be at 0.65% and 0.70% for end of Q3 and Q4 2015, respectively, which is below the forwards".