The Impact of a Rise in Yields and Decline in Oil Prices on European Bond Markets

We remain bearish on European government bonds (EGBs) for the coming weeks and months. We expect increased upward pressure on yields to come from a rise in yields in the US and domestically as a strengthening of the Eurozone economy will cause the ECB to turn less dovish.

Last week a decline in oil prices and increased scepticism on the ability of the new US administration to deliver its promised fiscal boost have raised doubt about the sustainability of the reflation story.

As a consequence core yields in USA and Eurozone decreased. US Treasury 10 years touched 2,4% and the Bund with same maturity returned to 0,4%. At the same time in Eurozone peripheral spreads have narrowed as the Dutch election result and latest French opinion polls have removed some of the political risk premium embedded.

While in most economies headline inflation is set to slow from current levels due to base effects, we think the trend in core inflation is generally up due to increasing manufacturing activity, and wage pressure. Even more importantly, recent changes suggest risks of deflation have considerably diminished. This has important implications for the monetary policy stance of central banks globally. With a few exceptions, we believe the markets might be underestimating the scope for reduced monetary accommodation.
 

Want to read more about market outlooks and our investment strategy?

Download our Voice of Wealth app available from the App Store and Google Play