Senior Fixed Income Strategist
Summary: Long-term yields are poised to rise further amid hawkish central banks, quantitative tightening, and the BOJ looking to exit the yield curve control. We expect 10-year Bund yields to test March highs at 2.76% in the upcoming weeks despite Germany being in a recession. At the same time, the German yield curve is likely to bull-steepen as investors position in the front end amid expectations of the hiking cycle to end. Within this context, short-term sovereigns offer a win-win solution. An investor buying 2-year Schatz today at 3.15% would still be in the green if rates were to rise by another 300bps throughout the next year, offering a decade-high yield and flexibility amid an uncertain environment.
With the ECB due to downgrade growth projections for this year and the next and increasing inflation forecasts for 2024, the case of stagflation becomes clearer. The big question is whether the ECB will continue to hike despite a recession in Germany and the Netherlands. Since the most prominent hawks come from these countries, a hawkish pause at this week's ECB rate decision makes political sense. Indeed, the ECB can enforce other tightening measures, such as ending reinvestments under the PEPP, without spooking markets.
The closer we get to the end of the hiking cycle, the more investors will position for the yield curve to bull-steepen. Therefore, in case of a pause, despite Lagarde maintaining a hawkish tone, yields will likely drop across maturities, particularly in the front end of the yield curve.
Yet, we do not expect the rally to last for long because selling pressure in the long part of the yield curve remains:
Hence, we expect Bund yields to continue to rise to test resistance at 2.76%.
Bond. Long Bond(s)
With real rates being too positive, we see three scenarios: Opportunity to lock in rates at cycle high, government overreach to keep the economy afloat or a complete reset of the economy.
Steen Jakobsen,
Chief Investment Officer
Is a bond bull market ahead? Inflation still poses a risk for investors, but the moment for increasing duration to your portfolio may be approaching towards the end of the year, when central banks might be forced to cut interest rates.
Althea Spinozzi,
Senior Fixed Income Strategist
The furious rate hike cycle has brought gains in the US dollar, but with stagflation risks in Europe and the UK and weakness in the Chinese economy, USD may have more room to run. But a strong dollar could also have repercussions for US growth, emerging markets and commodity prices.
Charu Chanana,
Market Strategist
With the cost of capital rising painfully, stagflation fears are back, illuminating the fragile state of the green transformation, while giving a tailwind to nuclear power, and threatening the growth of AI-related stocks.
Peter Garnry,
Head of Equity Strategy
With supply tightness not only in energy but all commodities, the momentum in commodity prices may continue, pressuring central banks to lower real rates. That could be a good setup for precious metals, including gold, silver and potentially platinum as well.
Ole S. Hansen,
Head of Commodity Strategy
As the pandemic showed, even the US Treasury can experience seismic shifts. With the government increasing the pace of issuing bonds to support fiscal spending, the complex Treasury market and regulatory constraints could spark a liquidity event.
Redmond Wong,
Market Strategist
The tide has turned for bonds. Given the current yields, bonds have become an attractive investment, with added benefits including lower risk than stocks, increased diversification and a steady stream of income unaffected by economic changes.
Peter Siks,
Investment Coach
