Investors have been anticipating lower financing costs on both sides of the Atlantic for months, which is reflected in lower yields on the secondary fixed-income market and higher bond prices. Global sovereign debt is already paying off in 2024 and achieves its best streak since December 2020 by chaining four consecutive months of benefits for the investor.
The Bloomberg index, which tracks the performance of a diversified basket of sovereign bonds of different maturities, from emerging and consolidated markets, and of investment quality, reached January 2021 with nine consecutive months offering profits to the investor. This pace was not even similar to date, with four months chained upwards. The expectation of a drop in interest rates in the eurozone and in particular in the United States increases the price of bonds on the secondary market up to exceed 203 points in this index. In other words, the person who includes this reference in his strategy would gain more than 6% in the last two months and 0.75% for the whole year.
Even though these bonds now reflect prices slightly higher than those recorded at the beginning of August, when the market anticipated a sharper rate cut in 2024 than is currently expected, the trend remains upward (contrary to debt yields on the secondary market). July and August were the two months that erased the losses of the first half of the year for the most conservative investor. And in this month that has just begun, a new rate cut is expected by the European Central Bank, but also the first of this cycle by the US Federal Reserve.
In fact, one of the main contributors to the decline in bond yields to maturity over the past two months has been US bonds. The July unemployment rate data in the country triggered panic over an economy seriously affected by restrictive policies from the Federal Reserve (Fed) and, therefore, more rate cuts to mitigate a recession in the United States. The market may have overreacted to the macroeconomic indicator two months ago, but most experts are still unaware that by December, the benchmark silver price in the country will fall by 100 basis points to 4.5%.
This leads to 10-year US bond at 3.93% yield on the secondary market, almost the same yield offered by two-year debt securities, at 3.19%, which tend to react more violently to changes in central bank policy. Thus, if an investor obtained profits on the price of bonds globally of 0.75% during the year, with US Treasuries alone, they would increase to 2.6% compared to 1% with European sovereign bonds.
The European Central Bank may have started its first rate cut early, but the market expects the U.S. Federal Reserve to do so at a faster pace in the coming months, according to Bloomberg. Some analysis firms are, however, cautious on this subject. A 100 basis point cut is expected by the Fed for the remainder of 2024.
Since there will only be three more meetings of the US monetary policy chief until December, this would imply that a downward adjustment of 50 basis points could be announced in a single meeting (the usual thing has been to make moves of 25 basis points or their multiples to date) that would oppose the calm observed over the last thirteen months when rates remained at 5.5%. “Even though the Fed seems ready to do a lot and quickly, it is not yet clear to us that it will eventually have to do so. For now, we maintain our view that it will cut only twice, by 25 basis points, this year, but with a significant risk of up to three,” comments Gilles Moëc, chief economist at AXA AM.
