There has been a significant resurgence of global bonds in recent months, positioning them to eliminate the losses incurred earlier this year. The Bloomberg Global Aggregate Bond Index experienced a remarkable surge of 1.3% on Tuesday, marking its most substantial one-day gain since March. This surge follows weaker-than-anticipated US inflation data, turning around a narrative that had previously seen the index down by as much as 3.8% for the year just weeks ago. As of now, it stands only 0.3% lower for 2023.
This global index, tracking a staggering $61 trillion, propelled forward as traders responded to the US inflation figures by reversing bets on potential Federal Reserve interest-rate hikes, instead favoring expectations of lower borrowing costs. The softened data contributes to the growing belief that the most aggressive tightening cycle in a generation is poised to decelerate global economies, potentially nudging central banks toward rate cuts in 2024.
Kellie Wood, deputy head of fixed income at Schroders Plc in Sydney, commented on the shifting dynamics, stating, “It doesn’t matter now what the Fed says about holding rates higher for longer; it’s likely to start a gradual easing cycle in the first half of 2024.” Schroders has positioned itself with a long position in two-year Treasuries, also favoring Australian and European rates, under the premise that global bond yields have peaked.
Markets are now factoring in more than a half-percentage point of rate cuts by July, doubling the anticipated amount at the end of October. The US core consumer price index, excluding food and energy costs, rose by 0.2% in October from September, falling short of the median forecast of 0.3% in a Bloomberg survey.
The repercussions of the softened inflation data were evident in the market movements, with US two-year yields dropping 20 basis points on Tuesday, and Germany’s yields falling nine basis points. Australia’s three-year yields followed suit, slipping 12 basis points despite stronger-than-expected local wage growth numbers.
However, some investors remain cautious, expressing concerns that the market might be overly optimistic about potential Fed easing. Pendal Group, for instance, closed a profitable long position in 10-year Treasuries after entering it in late October. Fidelity International has also scaled back some of its longer-duration bets, including reductions in its positions on US 30-year bonds.
George Efstathopoulos, a fund manager at Fidelity International in Singapore, cautioned, “Investors should have been already in the trade, especially as yields hit 5% and above… Some of the cuts that are being priced in for next year might be a little bit premature.”
Amy Xie Patrick, head of income strategies at Pendal Group, expressed a preference for the relative safety of two-year Treasuries. Schroders is similarly maintaining a long position on two-year notes while keeping a “modest short” on 30-year bonds due to concerns about widening US fiscal deficits, as highlighted by Wood.
This resurgence in global bonds marks a stark reversal from the recent trend that saw yields reach the highest levels in over a decade. Investors who faced substantial losses earlier in the year now find solace in the belief that their long-held conviction of an impending global recession may soon materialize.
“We have reached ‘peak everything’ — as all the factors (fiscal policy, liquidity, China growth, housing, credit, and employment) that have contributed to the global economy’s resilience are showing signs of weakness,” noted Steven Boothe, a fund manager at T. Rowe Price Group Inc., emphasizing that the significant bond sell-off in 2022 has created a compelling buying opportunity for a diverse range of investors.
Source: Bloomberg
