Temporary calm for global government bonds

Tue May 21 2024
Gil Ecker (244 articles)
Temporary calm for global government bonds

Global government bonds are expected to experience a temporary period of calm.

Analysts predict that significant changes in global government bond yields are unlikely in the near future. While interest rates have reached their highest point, the presence of persistent inflation suggests that any rate cuts will be gradual.

Refinitiv predicts that the money market forwards price in rate cuts by the U.S. Federal Reserve, the European Central Bank, and the Bank of England for this year. The expected cuts amount to 42 basis points, 65 basis points, and 55 basis points, respectively.

This is significantly lower and considerably delayed compared to the numerous interest rate reductions that were expected earlier this year.

“We anticipate that the Fed will implement two rate cuts, beginning in September, and we do not expect government-bond prices to experience a significant increase from their current levels,” stated Mohit Kumar, the chief European economist at Jefferies, in a written statement.

According to the speaker, the markets have already factored in a significant likelihood of a rate cut by the Fed in September, which means there is not much room for yields to decrease.

According to Jefferies, it would be wise for investors to reconsider their positions on short-dated U.S. Treasurys or German Bunds, as they are predicting a decrease in prices and subsequently an increase in yields.

According to the U.S. bank, there is not much room for differences between the Fed and the ECB, and they predict that the ECB will make cuts in June, September, and December.

According to analysts, the current interest-rate outlook has reduced the appeal of duration strategies, which rely on a bond’s sensitivity to interest rate changes.

“The current absence of any crisis or recession that would necessitate interest-rate cuts has led us to exercise caution regarding duration,” noted Jamie Searle, a rates strategist at Citi Research.

According to Citi Research, the 10-year German Bund yield is now projected to reach 2% by the fourth quarter of 2024. This forecast represents a slight adjustment from their previous expectation of a larger decrease to 1.85%. According to predictions, the yields on ten-year U.K. gilts are expected to decrease to 3.4%, which is slightly lower than the previous estimate of 3.25%. The current yields for these are 2.52% and 4.14%, as reported by Tradeweb.

Chris Iggo, the chair of AXA IM Investment Institute and chief investment officer of AXA IM Core, shares a cautious approach to duration strategies.

It is unlikely that long-term rates, specifically 10-year government bond yields, will experience significant increases beyond the range they have been trading within this year.According to his note, it is unlikely that long-term yields will experience significant decreases.

The speaker noted that interest rates have reached their highest point and the immediate threat of further rate increases has subsided. However, due to inflation persisting above the target set by central banks, the process of monetary easing will be gradual.

However, the current stability in bond markets may be short-lived due to the ongoing uncertainty surrounding inflation and interest-rate projections.

“Considering the current circumstances and the absence of any immediate need for interest-rate cuts, we recommend adopting a cautious approach in the short term. However, we still believe that it is wise to hold onto long-term investments, although we have slightly adjusted our yield forecasts for the end of the year,” stated Searle from Citi.

Financial markets are anticipating rate cuts from the ECB in June, the BOE in August, and the Fed in the autumn, as reported by Refinitiv.

Gil Ecker

Gil Ecker

Gil Ecker is Charting & Technical Analyst. He has more than 10 years experience of Global Stock Markets.