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Bond Bull Rally Delayed: What You Need to Know as Yields Rise
US Election 2024 5 minutes to read
Althea Spinozzi
Head of Fixed Income Strategy
Main takeaways:
- Elevated Yields Expected: Trump’s re-election and a resilient economic outlook for 2025 have pushed sovereign yields higher, with the 10-year Treasury yield testing resistance at 4.4%. Stronger-than-expected growth could keep yields elevated and volatile.
- Fed Policy and Economic Indicators to Watch: With steady payroll growth and moderate inflation projections, the Fed may proceed cautiously with rate cuts, potentially "skipping" cuts if job growth remains stable.
- High-Yield and Short-Duration Bonds Favored: To navigate yield volatility, long-term investors should consider high-yield corporate, emerging market, and short-duration Treasuries for income stability and lower duration risk.
Sovereign Yields Surge as Trump Victory Signals a New Economic Chapter
With Trump’s re-election igniting fresh momentum into the U.S. economy, sovereign yields have surged, bringing the 10-year Treasury yield to a critical test of its descending trendline—an important resistance level. A decisive break above this point could signal a shift in market sentiment, prompting investors to recalibrate their expectations for the economic outlook and the trajectory of interest rates.
Market sentiment is shifting due to the absence of a recession in 2024, which has set the stage for a more resilient economic landscape in 2025. With consensus forecasts pointing to modest growth without a dramatic slowdown, the potential for stronger-than-expected economic performance could keep long-term rates elevated and volatile, moving within a broad range as investors weigh competing signals. Long-term investors should prepare for a scenario where rates settle around 4% unless a pronounced economic slowdown occurs.
Key Economic Indicators to Watch:
- Economic Growth and Inflation: Consensus estimates project U.S. real GDP growth at 1.9% for 2025, with consumer prices expected to rise by 2.3% at the headline level and 2.1% at the core level. If growth and inflation end up to be stronger than expected, yields may remain high, impacting long-duration bonds.
- Employment data: The Fed may slow or skip rate cuts, as payroll growth remains stable, suggesting fewer rate cuts are likely unless job growth slows significantly.
High Carry Remains a Preferred Strategy for Long-Term Fixed-Income Investors
Given the current economic backdrop, long-term investors can benefit from a balanced approach that combines high-yield instruments with low duration risk. While the market may be volatile, careful selection of high-yield corporate bonds, emerging market debt, and short-duration Treasuries can provide income stability. This strategy aligns with the economic outlook, which points to a soft landing but acknowledges potential surprises that could influence inflation and Fed policy. Long-term investors can explore several fixed-income strategies to enhance portfolio resilience and generate returns:
1. High-Yield Corporate Bonds:
Despite tightening spreads in the U.S., high-yield corporate bonds continue to offer attractive income. Companies have successfully extended their debt maturities, reducing refinancing risks and creating stable cash flow. High-yield corporate bonds are suitable for investors looking to balance income generation with moderate credit risk.
2. Emerging Market Bonds:
With global economic resilience and high-carry potential, emerging market bonds present a viable option for income-focused investors. These bonds provide higher yields relative to U.S. Treasuries and may benefit from a weaker U.S. dollar environment if the Fed continues to ease.
ETF: Vanguard USD Emerging Markets Government Bond UCITS ETF (VEMT): This ETF provides exposure to U.S. dollar-denominated government bonds from emerging markets, balancing higher yields with the stability of sovereign debt.
3. Sovereign Bonds in Europe:
In Europe, government bonds from countries like Italy offer yields above the EU average, providing a cushion against inflation. Italy’s BTPs, for example, offer competitive yields and can serve as a hedge against both inflationary and deflationary risks in the eurozone.
4. U.S. Treasuries with Shorter Durations:
Given the uncertainty around the Fed’s rate path, shorter-duration Treasuries can help investors manage interest rate risk. A focus on 2- to 5-year Treasuries could provide stability, offering yields with lower price sensitivity to rising rates.
ETF: iShares $ Treasury Bond 1-3yr UCITS ETF (IBTS): This ETF focuses on short-duration U.S. Treasuries, which can help manage interest rate risk while providing yield stability. It’s a good choice for investors seeking liquidity and minimal sensitivity to interest rate changes.Other recent Fixed Income articles:
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