The debt market once again reflects the possibility that the US Federal Reserve not so aggressive in your cuts of rates as investors discount. This translates into an increase in the profitability of the US bonds which is separated from the main European reference, the German bond, and which left the difference between both at the close of the European session this Tuesday almost at highs not seen since the close of May 2024.
The ten-year German bond reached a yield of 2.3% in the secondary market while its US counterpart exceeds 4.2%. This placed the difference between the two, what is commonly known as risk premium, above 190 basis points not seen in five months. And, although the sales in the debt market as the American session progressed left this differential at 189 points, it can be seen how in recent months the American debt shows greater risk aversion than in the European case.
The European Central Bank started lowering interest rates earlier than the US Federal Reserve (Fed). And, although the latter surprised the market with a cut 50 basis points in one gothe market continues to expect the ECB to maintain the initiative in the coming months despite it not existing “a path marked in the cuts“, as Christine Lagarde herself highlighted. Just yesterday the president of the ECB emphasized this idea.
On the other hand, the US economy continues to show its strength in data such as employment with a core inflation that rose above 3.2% two weeks ago. There is also concern about a rise in oil prices that will generate a new escalation in inflation, as members of the Federal Reserve recently stated. For now, there are no changes in the rate cut forecasts for the rest of the Fed’s meetings in 2024. Two cuts of 25 basis points continue to be the option discounted by the market (or a cut of 50 basis points given that To date, the United States Federal Reserve has moved its reference by 25 basis points or multiples thereof).
But the market expectation changed for next year. According to the OIS contracts that it collects Bloomberg, The Federal Reserve rate will close 2025 at 3.5% compared to the current 5%. These same financial instruments invited us to think at the beginning of this month of 3% at the end of next year. That is to say, the market has erased 50 basis points of cuts of the United States Federal Reserve in 22 sessions. Furthermore, this half a percentage point disappeared between the meetings scheduled from January to March, so the first pause in the flexibility of US monetary policy in the middle of the downward cycle could come in early 2025.
This context explains part of the rebound in the US debt curve, with three-month debt above 4.6% in the secondary market while 30-year bonds are close to 4.5% (the curve remains inverted although not in the period between two and ten years). But investors are also looking at the future of the fiscal deficit in the United States a clue as to where the country’s sovereign bond prices may be found beyond November. The latest polls published in the country give a greater probability of victory to Donald Trump in the presidential elections in two weeks. In fact, Kamala Harris would have lost her lead, according to the US poll aggregator RealClear Pollingsalthough the distance between both is almost zero.
“The bond market is starting to put a price on Trump’s arrival“, they commented in a note from Banca March. “The Republican agenda is more inflationary than the Democratic one. Traders are weighing the impact of a victorious Trump given his promised tax cuts which would ultimately lead to higher price growth and also higher rates,” added Pictet AM investment advisor Cristobal Dembik.
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