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What RBS Says to Buy for 'Cliff-Edge' Scenario

Tuesday, 29 Jun 2010 | 5:41 AM ET

Investors should position their portfolios for a sharp rally in bond prices because stock and commodity markets are heading for a "cliff-edge," Andrew Roberts, head of European rates strategy at RBS, told CNBC Tuesday.

Roberts said he thinks that the economic recovery is far from stable and central banks are going to be forced to pump fresh liquidity into the financial system.

As economic data continues to reveal weakness ahead, it will "ignite the next leg of the very strong bond rally," he said.

"All the building blocks are in place to be very bullish on bonds … There's a complacency about how the world looks," he added.

Roberts recommended buying long-dated haven bonds in the U.S., UK and Germany. He added that the yield on U.S. Treasurys and German bunds could fall below 2 percent, with UK debt yields not far behind.

The strong stock rally over the last year has been the result of government stimulus measures, but it doesn't change the underlying economic weakness, he said.

There is a massive deleveraging trend that is currently taking hold of the global economy in the wake of the "dramatic move up in household debt" of previous years, he noted.

"There's no question at all that is going to result in lower-trend GDPs, lower growth, lower prosperity etc., don't shoot the messenger here for saying that," he added.

Roberts said that both the International Monetary Fund and the European Central Bank have raised their "alarm level" with regards the economic outlook, but thinks that investors are slow to pick up on the growing danger.

"Why is there a level of complicacy in global fixed income and global asset markets?" he said.

"The next shock and awe will be in the form of large scale QME (Quantitative Monetary Easing), but with one massive difference – it will be focused on lowering yields, not expanding money supply," he wrote in a research note.

Contact Europe: Economy

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