For the second time in a row, monthly unemployment data in the United States is shaking up the debt market. Although the opening of the week on the secondary market was characterized by a slight increase in yields in some cases, fixed income purchases are still putting bond prices at their highest levels of the year in benchmarks such as US securities. With this, the sovereign debt, credit and corporate markets as a whole on a global scale accumulates gains above 3.1% for the first time this year. And bond price gains should increase if expectations of lower interest rates are finally met by major central banks.
Bloomberg’s benchmark index for global investment-grade debt is above 486 points, peaks not seen since April last year thanks to the appreciation of sovereign bonds and companies from emerging and developed countries. The reading made by investors and analysis firms, in general, shakes up the soft landing of the US and eurozone economies after years of tight monetary policies. In other words, the escalation of inflation of the past years would be brought under control and recession on both sides of the Atlantic would have been avoided. This is also reflected in the debt market.
Not everything is said yet. The consensus of experts also does not expect a downward adjustment as rapid as that observed with an increase in interest rates mainly in 2022. But the evolution of bond prices fuels the attractiveness of fixed income securities in a context of total monetary easing. “The change in the interest rate cycle is a excellent news for bond investors“A drop in rates is equivalent to a rise in bond prices. The profitability of the intermediate part of the curve is currently interesting and the risk is low,” comments Rafael Alonso, analyst at Bankinter.
The debt market has been marked so far by volatile inflation data on both sides of the Atlantic. And with price inflation all but contained and close to optimal levels for the European Central Bank and the US Federal Reserve (Fed), employment data is now taking on greater importance as sign that the economy is not collapsing after months with rates at 5.5% in the United States and 4.5% in the Eurozone (4.25% since June this year). Investors’ expectation that there will be a new rate cut in the Eurozone in September and the first by the Fed is what is driving this gain this year with fixed income securities above 3%. If we only consider the corporate debt category, it exceeds 4.8% over the whole of 2024.
This advantage is reduced if only investment-grade sovereign debt is considered. The Bloomberg index, which tracks a basket of government bonds with a minimum rating of AA2 either AA3According to the agency, implies profits for the year of 2.2% with data as of the end of last week. By country, the biggest price gains are in Norwegian and South Korean debt in their own currencies, with gains so far this year of more than 7% and 5%, respectively. However, it is U.S. debt that is the biggest contributor to the overall global government securities category as it is the market benchmark.
The profitability of The US 10-year bond stands at 3.7%. In other words, in just 4 months, the yield to maturity of these securities has fallen by almost 100 basis points, more than the German bond, which currently stands at 2.17%. In fact, US two-year securities have suffered a decline of more than 120 basis points over this period, which shows that the shorter sections of the debt curve react more virulently to expectations of short-term rates in the United States.
This week, it is the turn of the European Central Bank, whose A further 25 basis point interest rate cut is expectedaccording to Bloomberg. However, the market is watching the September 18 meeting of the US Federal Reserve with particular attention. Barring any surprises, the market is more likely to ignore the announcement of a first 25 basis point cut. However, in recent weeks, the possibility of seeing a first cycle adjustment with a 50 basis point move that would leave the dollar price reference at 5% has also been considered.
Whether or not Fed Chairman Jerome Powell announces a more drastic rate cut at the September meeting, the market is pricing in a 100 basis point rate cut by the Federal Reserve over the remainder of 2024, with only three meetings remaining this year (counting September). So, either at one meeting this year announces a movement of more than 25 basis points either the market is proposing a much more flexible monetary policy than Powell actually wants to implement. On the other hand, and assuming that the Federal Reserve continues to adjust interest rates as before (with movements of 25 basis points or their multiples), over the next twelve months the reference rate in the United States will fall by more than 200 basis points. points up to 3.25%, according to market expectations.
