The surge in bond yields isn’t just a U.S. story.
The benchmark 10-year German bund yield TMBMKDE-10Y, 0.270% has climbed from -40 basis points in early December to positive 23 basis points on Tuesday.
Strategists at Goldman Sachs GS, +0.58% note that change comes on growing expectations of a European Central Bank interest-rate hikes to fight surging inflation. Goldman’s economists expect two quarter-point rate hikes this year, and another 50 basis points of tightening in both 2023 and 2024.
The Goldman strategists note the European stock market has discounted the change fairly well. As of Tuesday afternoon, the Stoxx Europe 600 has dropped 5% year-to-date.
“We think that the dramatic shift in rates, especially in Europe, is a sign that the problems that plagued Europe in the last cycle—low nominal GDP growth, disinflation, no earnings—are finally diminishing,” they said.
Valuations, they add, are reasonable, below 15 times forward earnings. And even though investors have increasingly bought European stocks to get more exposure to value, the cumulative impact is still fairly low, they said.
The Goldman strategists retained an overweight rating on European banks, which on Tuesday had a strong showing, with CaixaBank CABK, +5.15% up 5% and Deutsche Bank DBK, +5.08% adding 4%. Even with the recent rotation into value, the price/earnings ratio, or P/E, on European banks is 9 times and the price/ book value is 0.75, they argue.
The Stoxx Europe 600 SXXP, -0.21% drifted 0.2% lower in afternoon trade, as the technology sector lost ground.