Bond market: what to expect in 2024?

“Investors in the fixed income they spent most of the 2023 trying to cope with severe surges of volatility as central banks have increased interest rates aggressively. However, circumstances should be less difficult next year: according to our forecasts, bonds should deliver in 2024 above-average returns, thanks to a higher coupon return, weaker nominal GDP growth and a gradual transition of central banks’ monetary policies towards modest easing.” He writes it Arun Sai, Senior Multi Asset Strategist at Pictet Asset Management.

What will happen in 2024

Our projections – we read in the long analysis – take into account various economic and technical factors. The main drivers of our analyzes for calculating projections are GDP growth, inflation and official interest rates. Specifically, “we expect the global economy to grow by 2.3% next year, below its long-term potential and down from 2.5% in 2023. Much of the slowdown will come from weak main developed economies, in particular the USA and China, while the emerging economies will overall record more sustained growth. And if growth slows down, so will inflation, which we estimate should fall at 4.6% globally in 2024, compared to 5.5% this year”.

What to monitor

“We also expect inflation in developed countries to fall tol 3.0% compared to 4.7% this year, which could lead the US Federal Reserve and the European Central Bank to start cutting interest rates by mid-2024, albeit by less than the market is currently anticipating. It is likely that the UK will see inflation more than halve to 2.5% from 7.4% this year, allowing the Bank of England to become the first major central bank to cut interest rates next year; Given these estimates, we expect UK base rates to fall by 75 basis points in 2024. On the other hand, pricing pressures are likely to persist in emerging economies; Chinese inflation will rise to 2% from 0.4% in 2023″, continues the analyst.

From the UK to Japan

As for government bondsthe United Kingdom and the United States “are expected to outperform their developed market peers. While emerging market local currency bonds are expected to emerge as the clear winners, with an expected return above 12% in U.S. dollar termsSA. This incorporates our forecast that the dollar will weaken more than 4% against a basket of currencies in 2024.”

“Dollar-denominated emerging market debt should, too outperform, as its current yield stands at 9%, the highest in the sovereign bond market, about 200 basis points above its 10-year average. Finally, according to our forecasts, the Japan the only market destined to generate capital losses; Furthermore, we expect anemic yields for Swiss government bonds, equal to just over 1%. Both Japanese and Swiss government bonds are in fact low-yield markets, in which land prospects annualized return net of inflation – or real returns – remain negative.”