Despite inflation still running clearly above the 2% tar-get at the beginning of 2024, investors initially optimis-tically priced in up to seven rate cuts in 2024 by the Fed, BoE and ECB. Financial assets rallied across the board as they reacted favourably to easing financial conditions and signs of robust nominal growth.

However, you can’t have your cake and eat it too. In April, against the backdrop of stubborn US inflation dynamics, 10-year US Treasury yields increased by 50 basis points. At the same time, the markets had to absorb a large amount of new Treasury issuance to finance the US government’s large deficit. Further yield increases would eventually hit risky assets and economic growth. However, at current levels this is not our base case. The Treasury still has levers to adjust its issuance composition in order to ease the pressure on government bonds. In view of the US elections later this year, it is in the incumbent government’s interest to maintain stability in the markets and the economy. Consequently, we do not recommend a substantial underweight in risk, and are maintaining a neutral positioning. However, another potential test of last year’s interest rate highs, mounting inflationary pressure and increasing debt issuance pose risks to our view. With regard to duration, we believe that some of these risks are already priced in at the current levels.

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