Over the past week, the US Treasury yield has fallen 10 basis points to 4.05%, with real rates slightly lower at 1.79%; BE rates also fell, reaching 2.25% (-5bps). Risk-off sentiment, fueled by concerns about a possible AI bubble, partially eased on Friday following reports that the Fed may be more open to a rate cut in December and that the United States may allow Nvidia to sell advanced chips to China. Mauro Valle Head of Fixed Income at Generali Asset Management underlines this, explaining that the labor market data for September, which arrived late, showed a relatively strong growth in NFP (+119K), with the unemployment rate rising to 4.4%. Despite the positive data, the labor market appears to be in a weakening phase.
Italy, spread can drop to 70 basis points
The Fed minutes indicated that many view a cut in December as inappropriate, while others are in favor, suggesting a pause at the December meeting. There is a clear divide between those who favor the slowing labor market and those who focus on the persistence of inflation — this divide remains unresolved by the absence of October employment and price data. The December meeting will be decisive and the market expects a cut with a 70% probability, supported by comments from New York Fed President Williams, who suggested “room for further adjustments” on rates. Our view is to expect a cut, as otherwise managing market expectations (and volatility) would be very difficult. We maintain a neutral stance on US rates, but considering the risks associated with upcoming economic data, we would adopt a positive stance with Treasury yields around 4.2%.
The GAM view
Bund yields – continues the expert – continue to fluctuate around the 2.7% level, with BE rates stable at 1.75%. In the euro area, PMI data confirmed a relatively positive moment in the European economy, with the manufacturing PMI slightly decreasing (49.7 versus 50.0) and a positive services PMI, still at 53.1. Weaker PMI data from Germany was offset by better data from France, despite the ongoing political lockdown.
The next inflation data is likely to be in line with the previous month’s levels, before an expected decline in the early months of next year. The market continues to expect no rate cuts from the ECB. We maintain a neutral-positive stance on German yields, believing that yields will continue to move within the range seen in recent months, supporting our strategy of maintaining long duration tactically, with yields around the 2.7% level. Italy has achieved its first credit rating upgrade from Moody’s in over 23 years, rising one notch to Baa2 with a stable outlook. “The upgrade reflects a consistent track record of political stability and policies that improve the effectiveness of economic and fiscal reforms and investments implemented under the National Recovery and Resilience Plan,” Moody’s said, adding that “we expect Italy’s high public debt to begin to gradually decline from 2027.” The Italian spread remains stable at 75 basis points, and in the coming weeks we could see a decline to 70 basis points, as issuance activity is set to decline.
portfolios, long exposure in terms of relative duration
The portfolios have long exposure in terms of relative durations, as bund yields are still close to the 2.7% level. Exposure to German bonds is underweight and exposure to EU bonds has been increased moderately. Italian stocks continue to be overweight, compared to a significant underweight on French BTPs. Exposure to Spain and Greece remains unchanged. Exposure along the curve continues to favor a long position on the 5-10 year segment and an underweight position on 30 year bonds.
