UBS Asset Management executives bearish on US bonds think German bonds are an excellent defensive asset allocation choice.

Kevin Zhao of UBS Asset Management plans to short sell US treasuries, betting that the strong performance of the US economy will weaken the attractiveness of government bonds as safe-haven assets. "We still hope to sell on rallies," said the global director of sovereign and currency funds at UBS Asset Management in an interview. "The US is still in the most advantageous position. It has not been affected by energy shocks and is still the biggest beneficiary of the artificial intelligence investment boom." On the other hand, he said German bonds are an excellent defensive investment choice. He believes that energy shocks will have a greater impact on European economic growth, and the region's benefits from AI investments are relatively limited, which increases the attractiveness of German bonds. Bond managers are increasingly concerned that the situation of accelerating US inflation is solidifying, eroding investment returns and keeping interest rates high. Zhao stated that the recent escalation of tension between the US and Iran has caused oil prices to soar, posing a greater threat to European growth than pushing up inflation. "We still like European bonds because the European economy has not benefited much from the AI investment boom, and rising energy costs are severely affecting its economic growth," he pointed out. Like Europe, Asia also relies on energy imports. But Zhao said that this drag will be offset by investments in AI. He said that if the yield on long-term German bonds rises by another 10 basis points, "we will buy." The 10-year German bond yield is currently at 3.12%, not far from the 15-year high of 3.20% reached in May. Zhao pointed out that next year's elections in France and Italy will further increase the attractiveness of German bonds, as elections will raise political risks.