Bonds on everybody’s lips Bonds on everybody’s lips Bonds on everybody’s lips

Bonds on everybody’s lips

Althea Spinozzi

Head of Fixed Income Strategy

Summary:  Markets are expected to experience volatility in 2024 due to weakening growth, declining inflation, and geopolitical tensions. Central banks are likely to hesitate to cut rates aggressively, leading to uncertainty in bond markets. Investors should focus on high-quality sovereign bonds, while selective investment in corporate bonds could be considered.


Weakening growth, inflation, and a shaky geopolitical environment

Markets should be ready for another bumpy ride in 2024. Although sluggish growth and declining inflation have set the grounds for lower interest rates, monetary policy uncertainty and geopolitical tensions will remain. 

As central banks started hiking policy rates aggressively, the probability of a recession increased among leading economists and bond futures priced prematurely a soon to come cutting cycle. However, central banks stuck to their “higher for longer” narrative upsetting markets throughout 2023. Fast forward, and policy rates have risen to their highest level in more than fifteen years. Despite economic woes, policymakers are not expecting to cut rates aggressively in 2024. However, a recession in the US economy could quickly change this.

A fragile geopolitical landscape will add to market volatility. The US is facing geopolitical tensions in Ukraine, Israel, and Taiwan. With the US going to the polls in November, the political situation will likely move to a gridlock in 2024, lowering the fiscal impulse and adding to growth uncertainty.

The above calls for caution from central banks when tightening the economy  further or easing it too quickly, implying higher volatility in bond markets.

The bond market offers attractive prospects for investors

Bond investors are presented with the opportunity to lock in one of the highest yields in more than ten years. Higher yields do not only mean higher returns, but also a lower probability of bonds posting a negative return even if yields rise slightly again.

With central banks likely cutting rates slowly, the lagged transmission of aggressive monetary policies from 2023 will continue to tighten financial conditions in the new year. This would favor extending duration and quality in the medium term.

There are three possible scenarios for developed market sovereign bonds in 2024:

  1. Soft landing scenario: the battle against inflation is over, and a deep recession is avoided, causing central banks to cut rates slightly, but not aggressively. Yield curves would bull steepen, with 10-year yields adjusting moderately lower from where they are today.
  2. Hard landing scenario: a deep recession forces central banks to cut rates aggressively, provoking a deep bull steepening of yield curves. Rates would fall considerably across tenors.
  3. The 70s scenario: inflation reignites, forcing central banks to hike again. This would see yield curves bear flattening, with front-term yields offering a considerable pickup over long-term yields.

Quality is king

Deteriorating economic activity and high rates do not bode well for risky assets, which could lead to higher corporate bond spreads amid slowing revenues and compressed margins.

While yields on corporate bonds in the US and Europe have risen together with sovereign yields, the pickup that investment-grade corporate bonds offer over their benchmarks is well below the 2010-2020 average. 

When looking at junk, the picture is even more depressing. USD high yield bonds pay 260 basis points over comparable investment grade bonds, a level in line with pre-Covid valuations when the Fed was stimulating the economy through quantitative easing and interest rates were less than half what they are today. In Europe, junk pays 310 basis points over high-grade peers, reflecting a more challenging macroeconomic backdrop.

Therefore, we see better value in developed market sovereigns, although a selective approach for corporate bonds remains compelling.

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Saxo Bank (Schweiz) AG
The Circle 38
CH-8058
Zürich-Flughafen
Switzerland

Contact Saxo

Select region

Switzerland
Switzerland

All trading carries risk. Losses can exceed deposits on margin products. You should consider whether you understand how our products work and whether you can afford to take the high risk of losing your money. To help you understand the risks involved we have put together a general Risk Warning series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. The KIDs can be accessed within the trading platform. Please note that the full prospectus can be obtained free of charge from Saxo Bank (Switzerland) ltd. or the issuer.

This website can be accessed worldwide however the information on the website is related to Saxo Bank (Switzerland) Ltd. All clients will directly engage with Saxo Bank (Switzerland) Ltd. and all client agreements will be entered into with Saxo Bank (Switzerland) Ltd. and thus governed by Swiss Law.

The content of this website represents marketing material and has not been notified or submitted to any supervisory authority.

If you contact Saxo Bank (Switzerland) Ltd. or visit this website, you acknowledge and agree that any data that you transmit to Saxo Bank (Switzerland) Ltd., either through this website, by telephone or by any other means of communication (e.g. e-mail), may be collected or recorded and transferred to other Saxo Bank Group companies or third parties in Switzerland or abroad and may be stored or otherwise processed by them or Saxo Bank (Switzerland) Ltd. You release Saxo Bank (Switzerland) Ltd. from its obligations under Swiss banking and securities dealer secrecies and, to the extent permitted by law, data protection laws as well as other laws and obligations to protect privacy. Saxo Bank (Switzerland) Ltd. has implemented appropriate technical and organizational measures to protect data from unauthorized processing and disclosure and applies appropriate safeguards to guarantee adequate protection of such data.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc.