In the early days of August, global stock markets suffered a decline that they had already managed to escape. Fears of an imminent recession in the United States, now distant, sowed panic among investors. In the midst of this terrible scare, the Japanese Nikkei lost 12% in a single session, and the S&P 500 lost more than 6% in three days. Those fears are now long gone and, in fact, global markets have since reached unprecedented highs, as has the Dow Jones.
The early trading sessions had one obvious beneficiary: fixed income. Many investors, driven by nervousness, chose to sell on the stock market and buy bonds on the secondary market, sending prices of this asset soaring. Since July 24, the U.S. 10-year bond—the global benchmark risk-free asset—has appreciated by 3.75%. Over the same period, the index that tracks the behavior of global debt—the Bloomberg Global Aggregate—has risen by 4.2%. These percentages, which are not so striking in variable income, are more than remarkable in an asset like fixed income, especially since it was completed in just a few weeks.
Alongside these price increases, the US T-Note has seen its yield drop from 4.28% (as of July 24) to 3.84% currently (in rates, price increases translate into performance declines). This yield on the US bond has just reached its lowest level since June 2023.
In the case of 10-year Spanish bond, The investor has seen gains of around 1.5% over the same period. The yield has fallen over the same period from 3.26% to less than 3.1%.
Positive in the year
After an authentic crossing of the desert, Fixed income is finally looking up. And the recovery has been swift. With this panic surging through the stock markets, all of Bloomberg’s major debt categories (19 in total) are already price positive for the year (as of the end of June, only 5 were).
An investor positioned in high efficiency Global (represented by the Bloomberg Global High Yield Index) has seen its portfolio revalued by 7.5% since the beginning of the year; emerging market debt in dollars has increased by 6.4%; global corporate debt is increasing by just over 4%, and global debt overall (whose behavior reflects the aforementioned Bloomberg Global Aggregate) is increasing by 2.5%.
The timing seems ideal for fixed income, with a cocktail of equity market fear unleashed earlier this month and the clarity already offered by the path to the long-awaited rate cuts. The Jackson Hole central bankers’ symposium only confirmed that the cuts are already here (“the time to adjust our policy is now,” said Fed Chairman Jerome Powell). Currently, the market expects total cuts of 100 basis points by the end of the year, both in the United States and Europe.
“Our view is that a Fed rate cut on September 18 is a given,” says Felipe Villarroel, partner and portfolio manager at Vontobel. From that point on, “future cuts and the pace of the easing cycle will be data-driven. If the labor market deteriorates rapidly, the Fed will pursue more aggressive cuts; if not, the Fed can afford to be more patient and.” “We have to wait for the stubborn services inflation numbers to continue to decline,” he adds. The current environment “is supportive for fixed income, as government bonds should be well supported.” […]. Despite bouts of short-term volatility, carry remains the driver of total returns for investors over the medium term, and given that the yields on offer are quite attractive, we believe bond investors are unlikely to be disappointed,” he says.
