Fixed income: Keep calm, seize the moment Fixed income: Keep calm, seize the moment Fixed income: Keep calm, seize the moment

Fixed income: Keep calm, seize the moment

Althea Spinozzi

Head of Fixed Income Strategy

Summary:  With the economic slowdown, quality assets will gain favor, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.


Rate cuts are coming for bonds

A slowdown in economic growth and a gradual decrease in inflation will give central banks the opportunity to dial back on their tight monetary policies and implement rate cuts as soon as in the second quarter of the year, building the case for a portfolio's extension in duration. 

Despite this, investors should refrain from getting too much exposure to bonds with ultra-long maturities as inflation remains above the 2% target. Monetary policies in developed markets will start to diverge in terms of balance sheet unwinding. In addition, the Fed will slow the pace of Quantitative Tightening (QT) to avoid a liquidity squeeze, and the ECB will accelerate it, beginning to runoff the Pandemic emergency purchase programme (PEPP) in June. This is likely to result in higher volatility in bond yields, especially in the longer part of yield curves.

Following a broad, cross-market rally over the past two quarters, markets might be underestimating both the upside and downside risks to the economy. The good news is that fixed income markets currently provide a variety of opportunities that can withstand multiple macroeconomic scenarios, thanks to attractive bond valuations and yields that are around their 15-year highs.  

Despite fiscal concerns, sovereign bonds continue to demonstrate their value as a portfolio hedge against growth and financial risks, with the front part of the yield curve offering a win-win solution.

Fixed income views

The Fed and ECB are likely to begin cutting rates around summer. Yet, policymakers will reinforce the message that they remain data driven and will proceed slowly as inflation remains above the 2% target.

If rate cuts do not materialise, a hard landing becomes more probable, particularly in the Euro area, where the economy has been stagnant since December 2022.

Investment-grade corporate bonds

Credit deterioration will accelerate as the economy slows, resulting in rating downgrades. Excluding pandemic highs/lows, investment-grade corporate bonds currently have the highest leverage on record, and the lowest investment coverage since the global financial crisis, making bottom-up analysis and cherry picking crucial.

High-yield corporate bonds

The high-yield corporate space is facing a double hurdle: deteriorating fundamentals, and increasing refinancing risk, as they approach a wall of maturities in 2025. Yet, as central banks prepare to ease financing conditions, junk bonds are likely to remain underpinned.

Investment implications

As the Federal Reserve and the ECB prepare to cut rates, there is scope to extend a portfolio’s duration up to 10 years.

Developed markets front-term rates have peaked in 2023 and offer a win-win scenario for medium-term and long-term holders. As an example, assuming a 6-month holding period, 2-year US Treasury yields need to rise above 6.1% to provide a negative return.

US long-term rates remain vulnerable to the pace of inflation returning to 2%, and a possible rebound in term premium. In case of a slower than expected disinflation trend, yields of US Treasuries with maturity more than 10 years might rise further despite the Fed beginning to cut rates. In Europe, long-term rates are fair, but we remain cautious on ultra-long maturities.

Investment-grade corporate bonds

Despite credit fundamentals deteriorating, investment-grade credit spreads will remain range bound as investors rotate from risk to quality.

High-yield corporate bonds

High-yield spreads are likely to widen gradually amid a slowing economy. Yet, demand is likely to remain robust as, on average, junk bonds on both sides of the Atlantic pay a yield above the past 14 years’ average.

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 05

  • 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
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.