Inflation will be at the forefront of monetary policies from now on. It means bonds will continue to fall. Inflation will be at the forefront of monetary policies from now on. It means bonds will continue to fall. Inflation will be at the forefront of monetary policies from now on. It means bonds will continue to fall.

Inflation will be at the forefront of monetary policies from now on. It means bonds will continue to fall.

Bonds
Althea Spinozzi

Head of Fixed Income Strategy

Summary:  The bond market is telling us that inflation will drive monetary policies going forward. We expect 10-year yields to remain rangebound between 1.4% and 1.6% in the US until the debt ceiling crisis has found a resolution. In the UK, Gilts remain vulnerable to inflationary pressures as they enter a fast area, which could take them to 1.2%. The divergence between German Bund yields and the breakeven rates continues to widen, showing that rates have plenty of upside. Investors will find it troubling that US, UK, and European investment-grade corporates aren't not offering a buffer against inflation expectations. At the same time, US and European junk bonds offer a small buffer against inflation expectations of 1.45% and 0.9%, respectively. However, UK junk bonds are offering zero returns in real terms.


We believe that the selloff in the bond market is finally putting things into perspective: inflation will drive monetary policies going forward.

Inflation expectations are rising across the world, driving nominal yields higher. The move can easily be attributed to rising energy prices. However, we have reasons to believe that other elements such as shortages of both components and labour add to the risk of persistent inflation.

Regardless, what is becoming clear is that central banks will need to respond to avoid the economy from overheating. Tight monetary policies impact economic demand, but to what extent can they resolve supply chain disruptions? The answer to this question is complex. Yet, it's intuitive to conclude that interest rates hikes might become necessary as early as this winter. The later central banks will begin to hike interest rates, the more they will fall behind the curve risking even higher inflation.

US Treasuries

US Breakeven rates resumed their rise but remain below their May highs.

Source: Bloomberg and Saxo Group.

Therefore it’s likely to see 10-year US Treasury yields trading rangebound between 1.40% and 1.60% until a resolution for the debt-ceiling is found. Indeed, long-term Treasuries will serve as a safe haven as volatility in the money market increases.

Source: Bloomberg and Saxo Group.

UK Gilts

In the meantime, 10-year UK breakeven rates spike to 2008 highs, pushing yields to break resistance at 1.07%. Ten-year Gilts are now trading in a fast area, which could take them to 1.2%.

Source: Bloomberg and Saxo Group.

German Bunds

The divergence between ten-year German Breakeven rates and Bunds continue to widen, showing plenty of upside for Bund yields.

Ten-year German breakeven rates rose to the highest level since April 2013. It adds pressure for higher Bund yields, which we expect to turn positive by the end of the year.

Source: Bloomberg and Saxo Group.

Corporate bond real yields

Probably, the most troubling factor for Bond investors is that corporate bonds are not offering a buffer against inflation any longer.

Investment-grade bonds in the US, UK and Europe are providing returns below zero in real terms.
Source: Bloomberg and Saxo Group.

Although US and European junk bonds provide a tiny buffer against inflation expectations, 1.465% and 0.95%, respectively, UK junk bonds provide near-zero real returns.

Source: Bloomberg and Saxo Group.

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 07

  • Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article
  • The rise of populism: Far-right parties will influence the future

    The disheartening cycle of unresolved geopolitical conflicts, the rise of polarizing political parties, and the stagnation of productivity.

    Read article
  • Investing in China: Navigating Q1 amid economic challenges

    Understand China's political landscape in Q4 2023 and the impact on counter-cyclical initiatives, with a focus on the pivotal Q1 2024.

    Read article
Disclaimer

The Saxo 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 is not intended to and does not change or expand on this. 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 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 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 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 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 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/en-hk/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo or its affiliates.

Saxo Capital Markets HK Limited
19th Floor
Shanghai Commercial Bank Tower
12 Queen’s Road Central
Hong Kong

Contact Saxo

Select region

Hong Kong S.A.R
Hong Kong S.A.R

Saxo Capital Markets HK Limited (“Saxo”) is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo holds a Type 1 Regulated Activity (Dealing in Securities); Type 2 Regulated Activity (Dealing in Futures Contract); Type 3 Regulated Activity (Leveraged Foreign Exchange Trading); Type 4 Regulated Activity (Advising on Securities) and Type 9 Regulated Activity (Asset Management) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products may result in your losses exceeding your initial deposits. Saxo does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo does not take into account an individual’s needs, objectives or financial situation. Please click here to view the relevant risk disclosure statements.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-hk/about-us/awards.

The information or the products and services referred to on this site may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and services offered on this website are not directed at, or intended for distribution to or use by, any person or entity residing in the United States and Japan. Please click here to view our full disclaimer.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc. Android is a trademark of Google Inc.