To sum up, what kind of investment prospects do European bonds have in this environment? We consider that they are particularly expensive. The drivers of low European bond yields are clear – weak economic growth and low rates of inflation, plus expectations of QE by the ECB. As and when the economic news flow becomes more positive, in Europe or its major trading partners, recognising that Europe will not drift into deflation in 2015, and also that the news about QE is priced in, then a reassessment will turn sentiment, especially in the more expensive parts of the European bond market such as Germany.
Andrew Milligan is head of global strategy at Standard Life Investments
Key points
* Worries about the strength of the German economy, combined with fears about the lack of reforms in France and Italy caused investors to pull risk off the table in October.
* Correlations between global bond markets remain rather tight.
* QE is clearly one driver of the current low level of yields.
