NN IP: Cut treasuries to a medium underweight

Over the past trading days, risky assets witnessed a modest recovery after the position-driven sell-off of the preceding two weeks.

The fundamentals remain strong, combining good macro and earnings data, gradual central banks and, in the case of equities, an attractive risk premium. This is also reflected in our scorecards, where the fundamental and behavioural data continue to point into the same direction. This is illustrated in Figure 2.

This week we cut our underweight in Treasuries one notch further to a medium underweight. From the current yield levels – 34bp as of this writing – we expect a gradual rise in bond yields driven by strong macro data and changing Fed expectations despite the German yield curve’s steepness. We also believe that at these levels the downside protection provided by German Bunds is limited. It would probably take  a big spike of risk aversion to see the yield on German 10yr go much lower. Equities remain our preferred asset class.