With continuous expectations disinflationslower growth and a cycle of easing of taxi of interest in most developed market countries, 2024 has been announced as L'most favorable year for bond yields. But surprisingly, just like in 2023, the solid US economic data at the beginning of the year spoiled the party. This is what emerged from the Bond Compass Q2 2024 on the key challenges and opportunities for bond market investors in the second quarter of 2024. While there is a hint of residual seasonality in some data, there is no doubt that both US growth and inflation have so far held upside surprises in 2024.
The response of institutional investors
The response from institutional investors was even more surprising. In fact, these remained firmly anchored to Treasuries and US corporate debt and reduced their allocations to Treasury Inflation-Protected Securities (TIPS). In an environment where overall allocations in the bond market have fallen to their lowest level in 15 years, demand for US Treasuries and bonds remains out of the ordinary. The same cannot be said of global sectors. The inflows towards the European sovereign debt, especially in the United Kingdom and France, have weakened, despite the macroeconomic context characterized by disinflation and recession being more favorable to bonds. Meanwhile, the demand for sovereign debt of the emerging markets came to a screeching halt as investors reassessed the rate-cutting cycle in the face of the recent acceleration in inflation.
Allocation at the extremes
Long-term investors' aggregate allocation to bonds versus equities has not been this lopsided since before the global financial crisis. In part this is due to the price effects; the recent dramatic outperformance of stocks has driven the equity allocations one step away from the highs of the last 15 years. The investments inbond instead they went in the opposite direction and to date (in aggregate) they have reached their lowest levels since the global financial crisis. The residual liquidity allocations they stand less than 3 tenths of the long-term average, after having been above average for most of 2023.
Demand for sovereign debt outside the US
While demand for Treasuries from institutional investors remained high in the first quarter, demand for European sovereign debt began to decline, especially in the UK and France. This suggests that stable demand from institutional investors cannot be taken for granted. The growing selectivity for sovereign bonds also extends to higher yield instruments. At the start of the year, demand for local currency emerging market sovereign debt and US high yield was on the rise, but inflows into emerging markets reversed sharply in February and March.
