Update Bonds: Why we prefer European bonds

We anticipated these kinds of measures and therefore stuck to our forecast of the European Central Bank (ECB) cutting rates continuously and more aggressively than the market is pricing-in. We therefore retain our overweight duration position in EU Treasuries. German Bunds are paying as of now 2.5%, France and Spain are at around 3% while Italy is around 3.5% on their ten-year maturities, which with an inflation rate that is coming back to the target rate, are offering an attractive real yield. That said, we are close to our targets, and we may decide soon if it is more prudent to take profits on such positions and reduce the overweight.

For the time being, the US economy remains strong, judging by manufacturing and labour market data. But we are avoiding US bonds for now, as tariffs, fiscal plans and policy uncertainty could eventually have an effect on inflation -- new inflation data will be released next week -- and owing to growth and debt concerns. Moreover, there is a section in a Trump proposed bill that could have a detrimental effect on foreign investor demand for US assets by taxing them and therefore reducing returns.

In the credits market, spreads are rich again, inducing us to keep our underweight position in emerging-markets debt and high-yield bonds until we see them widening again so we can take profits. This is a likely scenario, given the almost continuous uncertainty generated by Trump and the probability that soft data leads to weaker hard data in the US economy. Aside from risk considerations and not ignoring that these bonds are offering close to 7%, these assets have US yields as their benchmark, which is not our preference for the reasons mentioned above. Therefore, among credits, our preference is for higher-quality securitized bonds, which are anticipated to perform better, given Europe's limited growth expectations in an uncertain environment.

Matias Grinberg