Everything seemed to be going smoothly for bond investors. After two disastrous years, during which these profiles had to bear double-digit losses, bond prices were finally starting to rise and portfolios were starting to recover. All categories of debt had already turned positive during the year, in the heat of the arrival of the rate cuts long awaited by central banks… Until October arrived.
A basket of global bonds -reflected in the Bloomberg Global Aggregate Index- the price has fallen by 3.4% in the last 30 days. This is its worst month since September 2022 (which was a dark period for this asset). With its declines in October, the indicator erases everything it had gained in 2024, the year in which it appreciated up to 3.8%. A large part of this drop is explained by the drop suffered by sovereign bonds: the Bloomberg Treasuries index falls 4% this month. The 10-year US bond saw its yield soar to 4.3%, a level it had not seen since July.
The penalty suffered by the bonds is mainly due to the disappointment of the slowdown in rate cuts. The market went from discounting, in September, cuts of 75 basis points in the United States until the end of the year, to forecasting only one, of 25 basis points; and in Europe, from anticipating reductions of between 50 and 75 points, to predicting only a reduction of 25 points.
Bonds have run a lot, and perhaps they have now gone too far. The global debt index had already been positive for 5 months; The price increased by around 9% between May and September. However, the correction may have been excessive. “We are seeing a very extreme and very bipolar attitude in the bond market lately,” comments Víctor Alvargonzález, founding partner of financial consultancy Nextep Finance. “In a matter of months, we went from repeating that rates would be high for a long time to managing completely unrealistic expectations that rates would fall, taking into account that inflation continues to decline moderately in the United States and that the North American economy maintains enviable strength”; In short, the market has overreacted and simply seeks balance, he explains.
“In addition to the impact that the change in rate cut expectations had, what happened was that investors bought with the rumor and sold with the news. The market had already anticipated the rate cut months before it happened And that’s the key, because no one thinks that rates will rise, or that inflation will stop falling. of those who sold in October did so because they bought with the rumor and sold with the news; or he came in late and when the sales and fear came, the stops losses”adds the expert.
In the words of David Ardura, Chief Investment Officer of Finaccess Value, “the market is now more pessimistic because we are starting to talk about inflation and maybe the economy is not as slow as we thought, we we can even talk about Cash In 10 years, it will reach 5%. We went from super positive expectations regarding rate cuts to seeing everything black, It’s a pendulum swing.” explain.
Global sovereign debt is doing the worst this month, with a 4% drop, and is followed by global debt with a 3.4% drop, but it’s not just them; The vast majority of major bond categories collected by Bloomberg are experiencing sales this month. Among the most penalized are credit (with a price drop of 2.6%), the overall debt of the United States (-2.4%) and treasures Americans (-2.3%).
Good time to buy
“Once the market has eliminated this optimism and has been in line with or above the Fed’s expectations, the window to take duration opens again,” explains David Ardura. As for Europe, Luis de Guindos, vice-president of the European Central Bank, stressed on Tuesday that the news was good for inflation and bad for growth, justifying further rate cuts and, once again , “opens the door to a certain duration” also in European bonds.
“Certainly, You should take advantage of this situation to buy European fixed income securitiesunderlines Alvargonzález, who points out that the market is making “a beginner’s mistake” like “not differentiating the situation of rates and inflation in the United States with that of Europe, which has nothing to do with it therefore, European bonds fell much less than American ones.
BlackRock analysts note that rising short-term U.S. Treasury yields and tightening credit spreads support their preference “for short-term corporate debt over long-term, long-term debt.” by that of Europe versus that of the United States. From the investment bank, they see opportunities in the the gilding British against T-note and, when it comes to corporate debt, they favor “short maturities over long maturities and European corporate debt over American corporate debt.”
