Our base case scenario remains intact: US government bonds will remain well bid in the near term, but they tend to be overbought and with poor value, particularly if compared to “hystoricals”.

Given the unattractive risk profile, we prefer short term maturities for government bonds.

In reality, we know that authorities have deliberately used all the policy tools available to lift asset values, encourage risk taking and ultimately stimulate growth. However, the unambiguous linkage between the Fed’s balance sheet expansion and financial asset prices is now put in discussion by experience. Even if it still remains clear that the mirror image of its balance sheet is the market value of financial assets, certain analysis confirm that, although long duration sovereign debt is typically the asset purchase of choice, yield have risen during the QE programs as often as they have fallen.

We, as all investors, move along with policy makers in uncharted territories, but do not forget sound fundamental principals. A recent study helps us highlighting that Treasury yields reacted by following the same pattern in the occasion of the previous QE intervention. Even if the nature of the “QEnfinity” is the same of the first version, the size and the timeframe are different and potentially unlimited.

Perhaps we tend to agree with those who state that risk-free government bonds may be overvalued if not in a bubble. Once their “safe-heaven status” vanishes, the bubble could burst. The case for a bubble could be more compelling in the future also for investment grade and high yield credits, where everyone is chasing yield right now to escape from financial repression and investment decisions tend to be distorted by unconventional monetary policies.

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