Fixed-Income Outlook: Don’t Miss the Forest for the Trees

Bond investors who are overly focused on individual data points may lose sight of the bigger opportunity picture.

As promised, the first quarter of 2024 has been a bumpy ride for bond investors. Markets continue to experience heightened volatility as participants pay close attention to every new economic data point, trying to divine the timing of the first central bank rate cuts. But investors who are overly focused on data surprises may lose sight of the bigger picture: Central bank rate cuts are coming, and with them a major opportunity for bond investors.

Look Beyond Data’s Day-to-Day

Not only are monthly macro data such as payrolls and inflation subject to large revisions and seasonal adjustments, but their components can be volatile. We think it’s more important to look at macro trends over time.

In our analysis, such trends strongly favor lower policy rates in the months ahead. Headline inflation in the euro area is falling faster than expected, and the European Central Bank may start to cut rates this summer. In the US, where progress has slowed on the disinflation front, we expect the Federal Reserve to hold off on easing until June at the earliest.

In the meantime, government bond yields remain very compelling, with AAA-rated 10-year German Bunds currently yield 2.3% and the US 10-year Treasury now yielding 4.2%.