European bonds extend rallies; Bund yields are record low….

Once a price trend begins in earnest, it usually self-perpetuates, just like Newton’s first law. One such trend to develop of late is found among government bonds.

German sovereign government bonds, usually known as Bunds, have soared as investors took fright of the continent’s economic prospect. So desperate are investors to buy safe haven assets that 10-year Bund yield slumped to a record -0.24%!  A quick look at Bund’s price trend, which moves in opposite direction to its yield, shows the asset at multi-year highs (see below).

In the UK, investors are too flocking to gilts. Gilts of 10-year maturity have jumped six points in just two months. This rally is the strongest in years (see Featured Chart). Oddly enough, the market’s view is in contrary to some of the Bank of England’s MPC members’ views. Ben Broadbent said recently: “Were the economy to develop in line with our projection…interest rates would probably have to rise by a little more than what was in the curve at the time of the forecast.”

With the prospect of the trade war widening, investors can not ignore that risk of a recession in the next few quarters. Preparations are made accordingly. Hence the rise in government bond prices. Moreover, energy prices are falling, thus reducing the need for a hawkish monetary stance.

Earlier in April, I highlighted the upside potential in bonds. If long, stay overweight bonds for now. Watch to buy only on setbacks.

 

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