The balance of 2024 for the debt market translates into the rebound in yields in practically the majority of sovereign bonds that left losses for the investor with the abrupt price change in the final stretch. However, the sovereign bonds leave losses of 3.7% in the year due to the fall in the prices of government securities, while the ten-year US bond increases its profitability to 4.55%. Thus, only corporate debt and high yield They give benefits to the investor over the last 12 months as a whole.
The fixed income market was marked in 2024 by central banks’ interest rate cuts and geopolitical tension. The profitability of sovereign and corporate bonds registered three clear trends in 2024: a general increase in yields until April, the collapse of yields until September and the sharp rise until the end of the year.
In the first four months, investors got used to the idea that large central banks such as the United States Federal Reserve (Fed) or the European Central Bank (ECB) would not make a drastic cut in interest rates in the year as they would. It was considered in 2023. This increased risk aversion in the debt market and tightened the profitability of bonds regardless of the maturity date. As an example, the Ten-year US bond recorded its highest of the year on April 25 above 4.7%.
As the summer progressed, macroeconomic data supported monetary easing by the ECB or the Fed and buying again took hold in the fixed income market. This led most debt securities to record their lows for the year. The US benchmark lost up to 110 basis points in just months while the German bond fell below the 2% return to maturity, lows not seen since the end of 2022.
However, the European fixed income chapter contrasts with the rest of the market. Weak German macroeconomic data caused German sovereign bonds to evolve differently. The early elections in the country were also reflected in the price of these debt securities and also had an impact the French political climate on the French debt which came to offer a higher yield than Greek bonds. And politics has become a constant in the eurozone market since the European elections were held in June.
All in all, it is the British ten-year securities that have increased their profitability the most in the year, more than 110 points since January, exceeding the 4.63% that are the maximum of 2024. The US securities would be left behind (71 points base difference in twelve months) followed by French bonds at the current 3.2%. The Japanese debt, whose central bank is one of the few that does is currently tightening its monetary policyare trading above 1% returns while Italian bonds and Swiss sovereign debt are on the verge of 2025 with yields lower than those of January 1, 2024.
Fixed income in the short term paints a different story. As investors’ risk aversion moves to the longer terms of the debt curve, the profitability of two-year bonds does reflect falls of more than 60 basis points in the case of Spanish debt or French. The two-year German bond, for its part, has a yield similar to that offered by ten-year securities (about 2%).
He increase in returns implies a drop in prices of debt securities (and vice versa) which implies price losses. In this way, an investor focused only on sovereign debt who had purchased a basket of investment grade bonds on January 1, 2024 twelve months later would have losses of 3.66%, according to the index of Bloomberg Global Treasuries. On the other hand, those who had also diversified their portfolio with corporate debt (excluding junk bonds) would bear fewer losses: 1.78% according to the index. Bloomberg Barclays Global Aggregate.
The sovereign debt of countries like the United Kingdom, the United States and even Japan left better opportunities than most European bonds this year. As an example, buying Japanese sovereign debt in July and selling in September would have obtained up to 17.5%, although for the year as a whole the losses are greater than 11%.
In this way, the best gains from the increase in the price of fixed income securities occurred in the high yield. In the whole of 2024, the Debt that implies greater risk leaves profits of 9.25% in the last twelve months. Only the high yield The American offered 8.1% while the European average exceeded 9%.
Short durations and diversification
Now, analysis and management firms are debating whether to increase the duration of portfolios or bet on shorter sections for next year. Likewise, they consider that in 2025 asset diversification will be key to get the most out of the fixed income market in the next twelve months in which investment grade credit and emerging economies such as India will have the key to the best returns for the investor.
For example, BlackRock, a firm recognized on a global scale for the volume of business it carries, is in favor of investment grade credit with short and medium durations, “which offer similar returns with less rate risk than long-duration credit” and also recommend the short tranche government bonds in the US and the eurozone and the gilts of the UK in general.
A similar approach is defended by Amundi. “Despite the expected volatility, the low probability of recession, combined with greater dovishness from central banks, favors credit markets in general, given higher yields than in the past and strong credit fundamentals. Bonds government, credit investment grade and the high yield In the short term, leveraged loans, emerging market bonds and private debt present attractive opportunities,” they point out in their forecasts for 2025.
“We believe US yields will remain elevated for the time being, but we see opportunities east of the Atlantic. The continued divergence between the US and Europe (including the UK) and the positioning for steeper curves should perform well through 2025,” said Alex Everett, chief investment officer at abrdn.
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