Boom in emissions government bonds in the 1st quarter of the year for approximately 400 billion eurosequal to over 30% of the total expected for the year. Net issuance since the beginning of the year is very high, with over 175 billion euros. Even considering the QT (Quantitative Tightening) of the ECB, almost 35% of the net volume of issues has already been placed on the market. This is what a Generali Investment report finds, according to which the acceleration of sovereign bond placements is justified by a revision of interest rate expectations.
More cautious central banks
“At the end of 2023 – explains Florian Spate, Senior Bond Strategist, Generali Investments – the financial markets were still expecting rate cuts reference points of more than 150 basis points by the Fed and by more than 160 basis points by the ECB for the whole of 2024. Since then, the forecasts have been reduced about 75 basis points (Fed) it's at less than 90 basis points (ECB). The correction of exaggerated rate cut expectations led to a notable rise in yields on both sides of the Atlantic in the first quarter.”
What to expect
For the experts at Generali Investments, “in the coming months, returns will remain within a rather narrow corridor. Since yields are currently atupper end of the band of negotiation, we expect a slight decline in the future. Overall, for the next three months we expect the 4.15% for returns US 10-year notes and the 2.30% for returns ten-year anniversary of the Eurozone”.
“Longer term, we see more potential for declines, particularly for US yields: our 12-month forecast for 10-year US yields is 3.85%.”
Euro area non-core government bond spreads continued to tighten amid the favorable market environment. Despite the levels achieved, we do not expect a significant widening of spreads in the short term
Elements of caution
However, there are elements that advise caution. “Self Trump will become the next president of the United States and will impose duties – explains Spate – this will slow down growth, but above all it will cause inflation to rise. With inflation expectations rising and a Fed alert, the decline in yields will be smaller than in the baseline scenario. If the Republican majority in Congress allows a rise in the budget deficit that offsets the growth-slowing effect of tariffs, U.S. yields could even move sideways from current levels. In this case, market participants should prepare for an increase in inflation expectations and a higher forward premium.”
And for the Euro Area?
“The aforementioned decline in bond market volatility, a modest economic recovery and the ECB's next cuts in reference rates” – it is underlined – “provides a significant technical support for non-core government bonds of the euro area. Compared to other risky fixed income asset classes, non-core EA government bonds they do not appear overvalued and low spread volatility means risk-adjusted spread levels are still quite attractive.”
“With no catalyst for a sustained trend reversal in sight, we recommend investing in non-core euro area bonds to benefit from the favorable market environment and gain carry,” concludes the analyst.
