Interesting story in the FT (Hedge funds bet on big Bunds sell-off) saying that more than 50% of fund managers at a conference in Monaco said they expect German bund yields to double within a year.
“Bunds are attractive to short because they are at historical lows in spite of the fact that the German fiscal position can only deteriorate,” said one hedge fund manager of a large top-tier global macro firm. “It is an obvious trade if you can wait.”
This is a difficult trade to handicap for the forex market because bunds could tumble due to Germany taking on additional (perhaps shared) debt or because the situation stabilizes in Europe and there is less demand for safety.
The second scenario looks most likely and would mean that money flowed out of German bunds and into Italian and other periphery debt, rather than out of Europe. Such a scenario would attract foreign capital to Europe and help boost the euro.