Everything seemed to be going smoothly for fixed income investors. After two disastrous years, in which these profiles had had to assume double-digit losses, bond prices were finally beginning to rise and portfolios were beginning to recover. All debt categories had already turned positive in the year, in the heat of the arrival of the long-awaited rate cuts by the central banks… Until October arrived.
A basket of global bonds -reflected in the Bloomberg Global Aggregate index- price has dropped 3.4% in the last 30 days. This is its worst month since September 2022 (which was a dark time for this asset). With its falls in October, the indicator erases everything it had gained in 2024, a year in which it appreciated up to 3.8%. Much of this decline is explained by the decline suffered by sovereign bonds: the Bloomberg Treasuries index drops 4% this month. The US 10-year bond has seen its yield soar to 4.3%, a level it has not seen since July.
The penalty suffered by the bonds is mainly due to the disappointment of the slowdown in rate cuts. The market has gone from discounting, in September, cuts of 75 basis points in the US until the end of the year, to now forecasting only one, of 25 points; and in Europe, from anticipating cuts of between 50 and 75 points, to predicting only one of 25 points.
The bonds had run a lot, and perhaps now they have gone too far. The global debt index had already been positive for 5 months; The price rose by about 9% between May and September. Now the correction may have been excessive. “In the bond market lately we are seeing a very extreme, very bipolar attitude,” comments Víctor Alvargonzález, founding partner of the financial advisory firm Nextep Finance. “In a matter of months we have gone from repeating that rates would be high for a long time, to managing totally unrealistic expectations of lower rates, taking into account that inflation continues to fall moderately in the US and the North American economy maintains enviable strength” ; In short, the market has overreacted and is simply looking for balance, he explains.
“In addition to the impact that the change in expectations of rate cuts has had, what has happened is that investors have bought with the rumor and sold with the news. The market was already discounting the rate drop months before it occurred. And this is the key, because no one thinks that rates are going to rise, or that inflation is going to stop falling. Most of the people who have sold in October have done so because they bought with the rumor and sold with the news; or he entered late and when the sales and fear arrived, the stops of losses”adds the expert.
In the words of David Ardura, investment director of Finaccess Value, “the market is now more pessimistic because we are starting to talk about inflation and that perhaps the economy is not as slow as we thought, we can even talk about the Treasury In 10 years it will go to 5%. We have gone from having super positive expectations about rate cuts to seeing everything black, It’s a pendulum movement,” explains.
The global sovereign debt is the one that does the worst this month, with that decline of 4%, and is followed by the global debt with its fall of 3.4%, but it is not only them; the vast majority of the main bond categories collected by Bloomberg suffer sales this month. Among the most penalized are credit (with a price decrease of 2.6%), the aggregate debt of the United States (-2.4%) and treasuries Americans (-2.3%).
Good time to buy
“Once the market has eliminated that optimism and has been in line with the Fed’s expectations or even above, the window to take duration opens again,” says David Ardura. As far as Europe is concerned, this Tuesday, Luis de Guindos, vice president of the European Central Bank, noted that the news was good on inflation and bad on growth, justifying further rate cuts and, again , “opens a door to take a certain duration” also in European bonds.
“Definitely, We must take advantage of this situation to buy European fixed incomepoints out Alvargonzález, who emphasizes that the market is making “a beginner’s mistake” such as “not differentiating the rate and inflation situation in the US with that in Europe, which has nothing to do with it; hence the bonds Europeans have fallen much less than the Americans.
BlackRock analysts note that rising short-term US Treasury yields and tightening credit spreads support their preference “for short-term corporate debt over long-term and by that of Europe versus that of the United States”. From the investment bank they see opportunities in the gilts British vs. T-Note and, with regard to corporate debt, they prioritize “short maturities over long ones and the debt of European companies over that of American ones.”
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