A just-published report updated our views on global capital markets, highlighting both the deeply oversold conditions that exist for most assets, yet the deteriorating economic outlook and sticky inflation in the developed world. A countertrend bounce could develop after the brutal price declines in recent months. However, the cycle is not over in terms of higher policy rates and bond yields.
The German Bund market has witnessed a dramatic increase in yields at a time of weakening economic activity in recent months, causing some investors to ponder whether a buying opportunity is at hand. We disagree, and examined the cyclical drivers of German bond yields and the market’s valuation metrics. Our analysis concluded that yields are not yet at attractive levels for longer-term investors. Although the Bund market has normalized to some extent, yields still have not overshot to the upside.
Bottom line: we remain underweight German and euro area government bonds within a currency-hedged government bond portfolio.