(Bloomberg) -- Traders risk being wrongfooted by bets that major central banks will move in unison to respond to the threat of prolonged war in Iran, according to Bhanu Baweja, chief strategist at UBS Group AG.
“The markets are pricing this like it was 2022 where you price up all central banks together — it’s a very different situation,” Baweja said in an interview with Bloomberg TV. A more “asymmetric” scenario is more likely, where the European Central Bank, the Federal Reserve and Bank of England respond in different ways, Baweja said.
Treasuries and gilts especially reflect unrealistic expectations that inflationary pressures will goad central banks into another 2022-style rate-hiking cycle, according to the strategist. Markets have ramped up bets on interest rate increases across major economies since the outbreak of war in late February, driving up government bond yields.
Investors willing to bet against the prevailing wisdom can reap value from short-dated debt where yields have risen the fastest, Baweja argued. The disruption to fuel markets is more likely to weaken economies and keep central banks from delivering rate increases that would further slow growth.
“In the fixed income markets, in the front end, there is value being created, particularly in the UK, particularly in the US,” Baweja said.
European bonds fell Tuesday, with shorter maturities leading the drop as money markets added to tightening wagers. The two-year German yield rose six basis points to 2.68%. US bonds slipped across maturities.
Markets balanced signs that tensions may ease in the Middle East alongside President Donald Trump’s threats to escalate attacks on Iranian infrastructure if a deal isn’t reached by his deadline of Tuesday 8 p.m. Eastern Time.
In a scenario where the war is quickly resolved, bonds are still in a strong position, according to Baweja.
“If things go well then fixed income, especially the front end, will do much better than it would do badly if things go south,” he said.
--With assistance from Alice Gledhill.
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