German Bunds could be the strongest assets among various government bonds.

Short Comment

Last week, US Federal Reserve sent dovish message to the markets again. Even though non-farm payroll published July 5 was better than expected, Jerome Powell, the leader of the institution, pronounced dovish stance in the House of Representatives July 10. In this point, major expectation about the policy is that the institution will lower the rate by 25bp on the meeting of coming July.

In fact, European Central Bank and Bank of Japan are using more dovish tools than US Federal Reserve. The main reason could be that macroeconomic indices of two regions are not good as much as those of the US. ECB is directly providing the liquidity to private banks unlike the Fed stopping buying the securities on 2014. Now market participants are thinking that the European institution could lower their policy rate which is already -0.4%, or implement Quantitative Easing program again, buying bonds in the markets directly.

Unlike European Central Bank or US Federal Reserve, Bank of Japan is continuing the QE program buying regional fixed income securities and ETFs of NIKKEI225 and TOPIX. However, the institution is fixing their target of yield of 10year Japanese Government Bond as 0%. We cannot expect that yield of 10year Japanese Government Bond goes below -0.2% as long as there is a fixed target of 0% for the yield.

The European institution is showing the most dovish stance among major central banks in the world. Regional macroeconomic situation which is giving grounds to the institution's policy is supporting the Bunds too.

Euro Area Manufacturing Production for last May recorded 0.9%, which is much higher than 0.2%, expected number. However, I believe it is one-time surprise. Recent indices in the area have disappointed the participants, and the trend will be continued. Of course, it is not just the concern of Europe. Economists are worrying about the contracting global real economy including the US where the economic growth recorded 3% for first quarter of this year.

The contracting economy will be not attacking global stock markets, and my main ground for it is the enough liquidity the central banks have been providing to the markets. Even though risky assets including the equities could be in the rally for a while, the volatility in the real economy should be good news for the safe assets like German Bunds too.

The rally has proceeded simultaneously in the stock markets and fixed income markets for this year. I believe that the rally will be prolonged with the full of the liquidity, and German Bunds could get the most benefits among the major government bonds. My target for yield of 10year German Bund is -0.5%.