From a monetary policy point of view, major central banks have successfully lowered pandemic-induced high inflation rates towards target rates. The ECB, BoE and Fed have started a rate cut cycle and lower key rates should support bond yields. From a fiscal policy point of view, however, costly expenditures during the pandemic had driven up deficit and debt levels. When public finances seem at risk of worsening, then bond yields tend to rise, and bond market participants now appear to be acting as “bond vigilantes” once again.
In this CIO Viewpoint Fixed Income – Bond markets between monetary and fiscal policies – we discuss the factors currently driving bond markets and present our view on bond asset classes.
Key takeaways:
- Central banks have successfully brought down inflation rates close to target levels and pivoted monetary policy towards a rate cut cycle.
- European elections and the upcoming U.S. presidential election, however, have shifted attention to budgetary issues and tariff risks that may drive up inflation rates.
- Bond yields currently seem to be caught between these two competing forces. We would therefore favour a defensive stance and avoid going longer than market duration.
