14 February 2025
Summary
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In summary:
Yield curve: The long duration sweet spot
Rising uncertainty due to back-and-forth tariff announcements sets the stage for lower economic growth, reinforcing our medium-term outlook for lower government bond yields. But the volatility presents attractive entry points for a long-duration strategy while the risk-return trade-off looks increasingly favorable. While US and German yields could rise modestly (+50bps) amid tariff-induced inflation fears, recession risks could drive them sharply lower (-200bps). Unlike the 2010s, investors benefit from high carry and a low equity risk premium, while bond-equity correlations are expected to become negative again, making bonds an attractive hedge. The optimal positioning lies in the 7-20Y segment for US Treasuries and 10Y for German Bunds, both from a carry and roll perspective as well as from an expected risk-return profile. A good entry point for a long duration position, given current volatility, would be 4.8% for the US 10y yield and 2.8% for Germany from today’s perspective.
Better late than never: France finally gets a budget
The Bayrou government managed to push through a watered down 2025 draft budget bill and escape a no-confidence motion. But the surviving budget leaves out several spending cuts and skews heavily towards tax hikes (EUR18bn) – including the surtax on domestic turnovers of companies (albeit only for 2025) and a minimum income tax rate of 20% for high-income households. The former should have a limited impact on traded French corporates (-2.1% median decline in income growth) as most large companies generate 70% of their turnover abroad. Volatility in French bond markets may rise in Q4 2025 as political deadlock may resurface during the preparation of the 2026 budget. New legislative elections are likely by then. To consolidate its finances while preserving medium-term growth, France should focus on targeted spending cuts and significantly lower taxation on labor, besides tackling excessive state pension spending.
Rare earth and no peace? The new frontline of minerals
Minerals and resources have become a key battleground of war economics, as seen in President Trump's claim on mineral-rich Greenland and the rare earth deal with Ukraine, besides the intensification of conflict in the Democratic Republic of the Congo, home to the world’s largest coltan, cobalt and tantalum reserves. Against this backdrop, speculation is creeping up for some metals (lithium, copper, gold). Meanwhile, record-high prices have not deterred investors from buying up gold. China recently allowed local insurance companies to invest up to 1% of their assets in gold, which could increase further upward pressures on gold prices by about 15%. Central banks have also been buying gold as countries try to build resilience against direct or indirect tariffs or sanctions from the US. We estimate that if China was to sell 10% of its US Treasuries holdings to pivot to gold, it could increase US yields by close to 10bps.
Authors
Ano Kuhanathan
Allianz Trade
Allianz Trade
Maxime Darmet
Allianz Trade
Allianz Trade
Lluis Dalmau
Allianz Trade
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