“While US bonds have already seen a steep rise in short-term yields, Europe is picking up more steam only now”, Gerlinger pointed out. With the Fed halting its bond-buying programme, the biggest US demand driver to date will be missing in the future. “The doubling of yields in the past three months is certainly due to the significant rise in inflation primarily and the more restrictive central bank policy”, Gerlinger added. It may well be possible that the rise in yields may continue toward recent highs of about 3.5 per cent. If there were to be an even more significant rise in inflation, however, an even stronger rise in yields cannot be ruled out entirely.”
“In our view, such a rise in yields to 3.5 per cent represents only a limited risk now”, Gerlinger said. “In absolute terms, US interest rates are attractive compared to other government yields.” Given the possibility of a weaker US dollar, however, the cost of currency hedging against the euro should be taken into account when planning investments.
Recently, spreads have widened in the US corporate and high-yield bond areas. Should economic data show positive news, such as an economic stimulus from China, declining inflation or falling yields, they would be narrowing again. Fundamentally, however, high vulnerability to rising interest rates or a significant deterioration in corporate data will remain in place.
With the yield on 10-year German bunds rising by more than 100 basis points in recent months, Europe still has a longer way to go. “The level is unattractive for investments”, Gerlinger explained. Peripheral countries saw an even stronger rise in yields. “In Italy, the yield on 10-year government bonds was over four per cent”, Gerlinger said. “There is a risk not only of a further rise in yields, but also of a resurgence of the euro debt crisis.“
In emerging markets, a weaker US dollar may make local-currency bonds look more attractive. In this segment, they are more attractive than bonds issued in hard currencies, which are suffering from rising interest rates.
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