Update Bonds: Recovery but no rally
The distress and sharp moves across all asset classes at the beginning of April has dissipated over the last couple of weeks, with bonds recovering though not rallying.
Since Trump’s 2 April tariff announcements, US yields have gone up and remained high, pricing-in higher inflation effects, while European yields have dropped and stayed at lower levels, based on an assumption of recessionary effects from the newly introduced tariffs. This makes sense, as the US Federal Reserve is on hold regarding further rate cuts and this is expected to remain for some time, while the European Central Bank continued cutting its policy rate last week.
The market has stabilised, as measured by indices such as the Vix and Move, which measure market volatility. Both have declined, although they remain at high levels historically. There remains much uncertainty in the market, caused by the unclear path that the Donald Trump administration will take on many fronts.
We hold a positive outlook on safe European long-duration bonds, based on our confidence in slower global economic growth and anticipated lower inflation. Yields have been adjusted in response to Germany's new fiscal plans and are close to ten-year historical highs at 2.5% for the ten-year Bund. With our end-of-year target set at 2.25%, we believe these bonds are unlikely to underperform. Instead, they are poised to provide a hedge against downside scenarios.
For the same reasons, we hold an underweight in riskier fixed-income assets, such as corporate junk bonds and emerging-markets debt, which tend to be more volatile. These risky assets have seen spreads widen during the last month, which made their valuations more attractive, compared to where they were before, when we had signalled them as too expensive to buy. We don’t see them as attractive enough yet though, especially considering the unclear economic outlook. But we will be keeping an eye on them in case they become too cheap not to act and to move to at least a neutral position. Regarding investment-grade corporate bonds, spreads have tightened by about 15 basis points from their recent peak. Given that we have a small overweight in the asset class, there could soon be an opportunity to sell, if our outlook remains uncertain for credit assets.