Traders work on the floor of the New York Stock Exchange (NYSE) on December 08, 2021 in New York City.
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Investors should short government bonds as higher interest rates are now “inevitable” around the world, a strategist has advised.
Speaking to CNBC’s “Squawk Box Europe” on Monday, David Roche, president and global strategist at Independent Strategy, shared his outlook on fixed income in an uncertain economic climate.
“In terms of bonds alone, my position is that I would run out of everything,” he said. “Short [German] bunds, which are now yielding positive, short Italy BTPs and short US treasuries…i would say I would most definitely be short [U.K.] gilts also because we are going to see a pretty phenomenal inflationary spiral in the UK”
European sovereign debt yields rose across the board on Monday morning, with the yield on two-year German government bonds rising 3.5 basis points to -0.215%, its highest since September 2015. German five-year bonds also briefly rose to their highest since 2018. Last month, yields on German 10-year Bunds rose above zero for the first time in nearly three years.
Meanwhile, Italian 10-year yields hit 1.776% on Monday, their highest level since May 2020, and Italian two-year bond yields were at their highest since mid-2020. In the United States, the yield on the 10-year Treasury note fell to around 1.9014% at 10:30 am London time, after a strong rise in the previous session.
Yields move inversely to bond prices, and “shorting” an asset like a bond is where traders place bets on the belief that its value will fall.
The moves in the European bond market came after hawkish comments from Klaas Knot, president of the Dutch central bank and member of the European Central Bank‘s governing council, on Sunday. Speaking to Dutch TV show ‘Buitenhof’, Knot said he expected the ECB to raise interest rates by the end of this year, with a second rate hike likely. to follow soon after.
When the ECB announced last week that it was keeping interest rates unchanged in the euro zone, ECB President Christine Lagarde did not reinforce her previous forecast that a rate hike was “very unlikely” in 2022, telling a press conference that the economic situation “has indeed changed.”
The ECB has so far resisted pressure to hike rates at a time of unprecedented inflation, with the latest reading hitting a record 5.1% last month, and the central bank trailing its UK and US counterparts regarding its normalization trajectory.
However, Roche told CNBC On Monday, it was inevitable that markets would see rates rise from “nearly every major central bank this year”, speculating that “we’re not even halfway” in the direction of interest rates.
Roche also warned that if Russia invades Ukraine, the outlook for the world economy and markets will be “radically changed”. On Sunday, White House national security adviser Jake Sullivan warned that an invasion could happen “any day.”