Spring turbulence in the bond market


Spring has brought dramatic trend changes in the financial markets. Government bond yields are rising sharply, while the stock exchanges are trembling. Furthermore, oil prices are up nearly fifty percent since the January bottom.

The German ten-year government bond yields have increased tenfold from 0.06 to 0.59 percent in three weeks. The Japanese and US bond market is also characterized by significant selling pressure.

Even after the spring jump in the yields the German government bonds continue to look as the biggest short-opportunity of our lifetime. At the current price level almost perpetual deflation is still discounted.

However history teaches us that it almost never pays to bet on deflation in countries with paper-based monetary systems.

The rate cuts are over

Why has the bond market turned so sharply? One reason is the oil price.

The decline last year gave the world economy a deflationary shock. However, this is now about to be reversed. Thanks to oil prices, among other things, inflation in the euro zone has again climbed into positive territory.

The second reason is that the economy in the euro zone is showing genuine signs of improvement. Growth is trending upward and unemployment is falling. This will eventually result in increased price pressure.

In the US the start of the year was weak but the prospects are good. This is manifested by strong optimism in businesses and households, rising incomes and falling unemployment.

We think the bottom in government bond yields has been passed and that the long term trend is upwards hereafter. In the stock market, the bond turmoil led to profit taking and a setback.

Industry rotation

The mixture of stronger economic conditions and continued liquidity from the central banks is normally a potent fuel for the stock market. We therefore are rather inclined to think that the prevailing weakness is a buying opportunity, especially for European equities.

A backdrop characterized by stronger economic growth and rising long term interest rates may trigger important sector rotations. Typical dividend stocks with bond-like characteristics such as Orkla, Telenor and Gjensidige may be in less demand.

Cyclical stocks can become more popular. This applies particularly to companies exposed to European consumers, such as Norwegian, Kongsberg Automotive and Ekornes.

More biotechnology

This week we include Aqua Bio Technology into the Dovre portfolio. The company develops cosmetic skin care products based on patented marine technology.

We are positive about the stock for three reasons. Firstly, the company announced recently a surprisingly aggressive dividend policy. This can hardly be interpreted in any other way than that the management is positive about the future.

Secondly, it seems the stock is undervalued according to several key figures such as price / book, dividend yield and NCAV / MCAP. Finally, the biotech sector is in shock internationally, creating a stock picking potential in the corresponding Norwegian companies.

Dovre portfolio

  • Kongsberg Automotive
  • Avance Gas
  • Aurora LPG
  • Nordic Nanovector
  • Marine Harvest
  • Aqua Bio Technology


In: Aqua Bio Technology

Out: Bionor