The analyst advises against a simple buy-and-hold strategy for peripheral European debt. Instead, they recommend tactically trading French spreads based on 2027 election newsflow and Italian spreads around potential 2027 budget negotiation frictions, citing unattractive risk-reward at current levels.
Any knee-jerk steepening of the UK gilt curve after the upcoming by-election and a potential Labour leadership change should be viewed as a trading opportunity to fade. It is too early to price in fiscal implications; the real risk premium will only become a factor closer to the autumn budget.
Despite near-term volatility, the risk of German 10-year yields sustaining a move above 3% is considered low. This makes the 3% level an attractive entry point for long-term investors, supported by strong investor demand and the view that a significant fiscal risk premium is not a major concern for Germany.
A strategic preference is given to overweighting German versus U.S. intermediate-term bonds. This conviction is built on three pillars: a bullish outlook on European duration, attractive relative valuations after adjusting for money market pricing, and a newly adopted bearish view on U.S. duration from the firm's American strategists.