Shinhan "European Bond Market Volatility, Safe Haven is UK... Increasing Government Bond Proportion Effective"

In the aftermath of the German general election, amid continued high volatility in Eurozone government bond yields, a strategy to increase the proportion of UK government bonds, which have relatively limited noise, has been deemed effective.

On the 13th, Shinhan Investment Corp. researchers Ji Baek-yeon and Ahn Jae-kyun stated in their report titled 'Overseas Bond Strategy - UK, a Refuge from Eurozone Volatility' that "the UK is relatively free from the volatility trends in the European bond market."

Previously, they had suggested a strategy to reduce the proportion of Eurozone government bonds to avoid volatility, and they forecasted that "until March 25, when the next parliament convenes, sharp fluctuations in the bond market depending on the passage of the German fiscal package may continue." They also noted that "unlike the German 10-year government bond yield, which rose more than 40bp (1bp = 0.01 percentage points), the UK 10-year yield increased by only 11bp."

They pointed out that the UK had largely absorbed fiscal-related factors last year and assessed that "the UK has a more favorable environment in both fiscal and monetary policy compared to the Eurozone." They also judged the likelihood of fiscal noise re-emerging in the UK to be low and viewed the possibility of further fiscal deficit expansion as limited.

Regarding monetary policy, they explained, "Since concerns about low growth remain, monetary easing may continue slowly," adding, "The recently presented UK neutral interest rate band by the Bank of England (BOE) is 3.0?3.5%. There remains about 125bp of room for cuts. This contrasts with the Eurozone, where concerns about the halt of the rate-cutting cycle have emerged."

They analyzed, "Some argue that the sharply rising Eurozone yields are excessive," but "nevertheless, the relative price attractiveness of UK government bonds has not been impaired." Currently, the yield spread between UK and German 10-year bonds is fluctuating around approximately 180bp. Furthermore, they stated, "Germany currently has to digest the European Central Bank's (ECB) pace adjustment of rate cuts and concerns over fiscal expansion," and concluded that "from the perspective of reducing portfolio volatility, a strategy to increase the proportion of UK government bonds, which have relatively limited noise, is effective."