US and German Government bonds: Run for safe havens continues
Markus Allenspach, Head Fixed Income Research, Julius Baer
There are two drivers pushing down yields of the German and US government bonds. First, there is growing unease among investors about the political landscape, with the reaction of the new US government on the North Korean nuclear weapon programme hard to predict. Political uncertainty also stems from the French presidential election. Second, we observe a consolidation of the reflation momentum after two strong quarters. Reflation did not start with the US presidential election. In fact, commodity prices had bottomed in February last year, while global purchasing managers indices started accelerating in August last year. After their strong advance, we have entered a period of consolidation, which causes some frustrati on among bond bears (analysts and investors looking for higher yields) as well as equity strategists. The confluence of these factors brought the yields of the German and US 10-year government bonds down to 0.1 per cent and 2.16per cent, respectively. At the same time, we note a widening of credit spreads as issuers rush to the market to lock in rates. Moody’s has rated $45 billion worth of corporate bonds last week.
We maintain our call for trend-like US growth and two more rate hikes in 2017, as well as rising US government bond yields. We still favour credit risk over duration risk in general and favour US senior loan funds as an instrument that benefits from rising money-market rates.