UPDATE: RBS advises clients to ‘sell everything’ except haven debt

The Royal Bank of Scotland’s credit team has advised clients to brace for a “cataclysmic year” and a deflationary crisis, warning that major stock markets could fall by a fifth and that the crude oil price may nearly halve, again, to $16 per barrel.

The bank’s credit team said markets are flashing stress alerts akin to the turbulent months before the Lehman Brothers crisis in 2008.

“Sell everything except high quality bonds. This is about return of capital, not return on capital. In a crowded hall, exit doors are small,” it says in a client note.

Andrew Roberts, the bank’s credit chief, expects Wall Street and European stocks to fall by 10%-20%, with an even deeper slide for the FTSE 100 given its high weighting of energy and commodities companies.

RBS forecast that yields on 10-year German Bunds, or government bonds, would fall to an all-time low of 0.16% in a flight to safety, and may break zero as deflationary forces tighten their grip. The European Central Bank’s policy rate will fall to minus 0.7%.

Indeed such bonds, and a few of their developed-market counterparts are about the only things RBS would be long of. It says be long “10-year gilts, USTs, Bunds and BTPs [Italian government bonds]”.

READ: Time to buy baked beans and a shotgun? 

It also recommended being long of shorter paper “as deposit rate cuts remain on the table,” especially in the eurozone, but also perhaps in the UK , which looks cheap as the few remaining Bank of England hawks (ie those who want to see higher rates) “get bounced from the table”.

“And mostly, beware of the risk-on optimists,” the bank goes on.

“One lesson from 2Q 2015 and the Bund sell-off we got caught in, is that we need to always ask ourselves what the exit door is with any trade – as we said into the credit crunch in 2008, this will be as much about limiting losses as making gains.”

This post first appeared here: https://news.markets/bonds/rbs-client-note-makes-waves-sell-everything-advice-8243/