Rothschild Private Banking & Trust has hardened its bearish stance towards government bonds, arguing that they appear even more expensive as their yields are in some cases less attractive than dividend yields from equities.

The private bank said it had warned about overvaluation of government bonds back in the spring of this year, and argues that the negative case has grown more compelling as the year has gone by.

“We also remain concerned about the longer-term outlook for government bonds. The fundamentals are shaky in most developed economies, where public debt levels are exceptionally high. There are major structural flaws in the eurozone, the US has massive unfunded liabilities and is dependent on foreign lenders, and Japan has arguably the worst demographics in the world,” the firm said.

“In our view, government bonds would only be attractive in a 'Japanese-style' spiral of depression and deflation. We do not think this outcome is likely, as central banks are determined to prevent another recession,” said the note, written by Dirk Wiedmann, head of investments.

Among its specific positions, RPBT said it recommended a “large underweight position” in government bonds but was more positive about corporate and emerging market debt. As fears have grown about deflation, the bank said that index-linked debt has underperformed relative to other debt instruments and will struggle for a few months.

Away from the bond market, RPBT is also underweight equities, noting that a strong series of earnings results could not galvanise further gains in markets, but equities were looking more attractive in relative terms. The firm remains overweight hedge funds and gold, but is bearish on most other commodities. It is also bearish towards property.