DEUTSCHE BANK: Bond yields could be about to bounce back up

For the past three weeks, financial markets have been processing the fallout from the UK’s vote to leave the European Union and the resulting economic uncertainty.

Investors have fled to the relative safety of bonds and so-called defensive stocks — shares in large companies that make consumer staples and products needed in good economic times or bad, such as pharmaceuticals.

Banks and housebuilders bore the brunt of the bad news.

“German 10-year bond yields dropped by 30bps following the vote on the back of increased uncertainty and expectations for monetary easing. This has led bond proxies (consumer staples, pharma) to outperform sharply, while financials and companies with large pension liabilities have dropped and cyclicals have underperformed defensives,” Deutsche Bank said.

Here’s that chart of German bunds following the vote:

But this trend might be about to reverse, according to analysts at Deutsche Bank.

Investors are preparing to take more risk, DB said, because the chance of a “Lehman Moment” following Brexit is diminishing, while Italy is tackling its banking crisis and Japan looks likely to boost government spending to stimulate its economy. This could see them move money from bonds, back into risky stocks. As the price of safe bonds decline, so the yield moves up.

Bank stocks look very cheap in Europe at the moment, if investors have the stomach for them.

Here’s the chart of their relative valuation against safer stocks:

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