And two. The European Central Bank (ECB) lowered its interest rates again on September 12, after a first movement in June. The deposit rate now stands at 3.50%, compared to 4% at the beginning of the year. The cycle has only just begun, although Christine Lagarde, head of the Frankfurt institution, is careful not to specify its exact calendar, dictated by the level of inflation.
“The ECB should continue the movement cautiously, at a pace of 25 basis points per quarter until the end of 2025, which would bring the deposit rate to around 2.50%”estimates Xavier Chapard, strategist at La Banque Postale AM. The US Federal Reserve (FED) also began to act by reducing its interest rate by 50 basis points on September 18. But since the situation is very different on both sides of the Atlantic, the two institutions will not advance at the same pace.
“The fall in interest rates is, in general, good news for financial investments”, specifies Louis de Varax, development director of the French Financial Union (UFF), “It occurs in a context of controlled inflation, which allows both consumers to recover purchasing power and savers to return to a positive real return (after inflation)”.
Several asset classes are favorably impacted by this new cycle.
Captivity
“The relaxation of rates by the ECB will progressively impact all interest rate maturities in the short, medium and long term”explain Benjamin Melman, chief investment officer at Edmond de Rothschild Asset Management. Therefore, interest rates should fall along the entire curve, at different rates.
However, there is an inverse relationship between the evolution of interest rates and the price of bonds: the value of bonds already in circulation increases when interest rates fall thanks to the law of supply and demand. In fact, investors tend to reposition themselves into existing loans, issued at higher rates, rather than newly issued loans, which are less attractive. Therefore, the profitability of fixed income funds should recover in the coming months, thanks to the increase in valuations..
“We prefer short and medium-term bonds, which can best benefit from the movement”continues Mr. Melman. Longer maturities remain subject to uncertainties linked to the US presidential election and the risk of budget slippage in the euro area. “Credit bonds, issued by companies, are more attractive for both short- and long-term maturities,” specifies Kevin Thozet, member of Carmignac’s investment committee.
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