“Despite the increase in returns, the world is not abandoning the bonds – nor threatens to no longer finance government deficits. The yields of the long -term US Treasury, between 4% and 5%, reflect the situation of the economy and the fact that the decade of low interest rates is now behind it. The good news? All this is potentially a good omen for an increase in returns for bond investors. Before the global financial crisis, the returns of a global aggregate strategy with a fixed income were quietly wandered between 4% and 5%: welcome back to that world “. Underlines it Chris Iggo, Chief Investment Officer of Axa im core, in a view on the prospects for equity and bonds markets.
Markets, it’s time for bonds
The current bearish bond market – explains Iggo – began in September, in conjunction with the cutting of the overnight rate by the Fed from 5.50% to 5.0%. It was a courageous move, a sign that the Fed was sure of having controlled inflation. The market, however, considered the move in a different way increasingly frequently, and the two subsequent rates cuts have strengthened the fears that inflation is still a risk.
Some believe that the Fed has loosened too and too early, taking into account the economic situation and the direction of the economic policy of the US government. Fortunately, the market has corrected a part of its excess in the wake of December inflation data, better than expected. The returns are still growing compared to 31 December 2024. The bonds therefore remain interesting.
Sentiments and technical data
Even the global bonds “are upward compared to the minimums of the last six months. The United Kingdom He recorded the worst trend, due to the fears relating to the fiscal outlook and the ability to attract sufficient foreign capital to finance his double deficit. The pound also went down. A weaker pound increases inflationary concerns and the Bank of England seems blocked regarding the bank rate. The market expects only two rates cuts this year, despite the tests that the United Kingdom economy is under stall (from a very low speed, GDP is flat since the end of the first quarter of 2024), while we of Axa IM we foresee four rates cuts in 2025 “.
In general, “government bonds are becoming more convenient than the swaps and corporate credit – a phenomenon that continues. Markets believe that government credit risks are increasing compared to companies, which are also issuing debt – over 80 billion dollars of Investment Grade bonds have already been sold in the primary market of the United States already this year. Banks that subscribe to new emissions of corporate bonds often protect themselves by selling government bonds. And if Trump will move to deregulation banks in the United States, they will need to hold government bonds. “
The year of bonds 3.0?
In the last two years I have been guilty of having propagated the narrative of the“Year of the bonds”, The expert still underlines. This was partly rewarded by the performance, even if volatility in the rates markets remained high. In Europe, the investment grade credit markets and the euro High Yield have had two positive years, and the short -term investment pound has also recorded a good performance. The short -term and lower quality credit recorded a better performance than long -lasting high quality government bonds.
It is positive that bond returns are high at the beginning of the year: this increases the probability of decent returns throughout the asset class. Carry alone will already be an important contribution.
The Outlook on rates
The pricing of the market has become more pessimistic on the prospects for rating reduction. United States rates e Of the United Kingdom, they are priced to remain between 4.0% and 4.25% indefinitely – this is positive for the bonds, if there are no reasons why the market is made higher rates. The outlook concerning inflation is fundamental: both in the United States and in the United Kingdom, the data on December inflation have been better than expected, bringing the hyper -incident bond markets to rise. In December, Core inflation stood at 3.2% both in the United States and in the United Kingdom. It must be lower than this value to ensure that the central banks move again downwards, but the December data are short -term positive. The risks related to energy and Trump are the main threats to short -term inflation.
The outlook on credit
The narrowing of credit spreads was “The “history of last year. It allowed the credit to swear rates in the investment Grade and High Yield markets. The reason that has led to an increase in rates and that leads not to predict significant ease of central banks – a strong economy – should also mean a stability of the credit spreads in the future. There is certainly a strong credit application.
Unless a surge in corporate loans related to mergers and acquisitions occur, or that the growth of profits slow down to threatening the ability of companies to face the payments of the coupons, credit markets should be a source of income Safe for bond investors in 2025.
Tall rates positive for bond investors
We actually live in an environment of higher rates than in the decade following 2010. I repeat, this is positive for investors looking for an income of bonds, explains Iggo stressing that the duration can be managed and covered, but the bond returns are stable and The power of capitalization should not be overlooked. Looking at the comments on the bond markets, the liquidity is good, the question is strong and the loss of money due to insolvenza is still a very rare event. We believe that global investors have little margin to increase their shareholdings in the United States, above all because it is likely that the performance remains rather concentrated and that the growth part of the market is expensive.
The bonds “offer an interesting diversificationand it is hoped that this can be successful in facing the challenges of the flow of political comments that have started to flow after the recent Trump settlement, “he concludes.