Update Bonds: Stability for now
After a 43-day impasse, the US government reopened on 12 November, following the passage of a new funding bill. The delay in key economic data releases caused by the shutdown has complicated the Federal Reserve’s policy outlook.
Ten-year US Treasury yields now hover just above 4%, reflecting modest but limited volatility. Market consensus, including ABN AMRO, anticipates further rate cuts by the Federal Reserve in the coming months. However, long-term yields are expected to rise, and the yield curve may steepen, as concerns about long-term inflation and government debt sustainability are likely to require a higher risk premium for longer-term bonds.
European Central Bank (ECB) policymakers have reiterated that the current level of interest rates is appropriate but emphasize a data-dependent approach. Members of the ECB’s executive board stated that monetary policy remains well-oriented, with no commitment to a predetermined rate path. The ECB’s priority is to ensure rates are compatible with its price stability objective. Current data shows inflation converging toward the 2% medium-term target. Risks of higher or lower inflation are balanced, and the ECB remains vigilant.
In November, eurozone government bond yields are so far remaining stable, with ten-year Bund yields at 2.65%. Semi-core and peripheral spreads are tightening, though France remains extremely fragile.
Investment-grade spreads in both Europe and the US remain robust, hovering near historic lows. High-yield bonds are also stable, with spreads close to their lowest levels since the global financial crisis.
The tight spreads are supported by the rate-cut cycle in the US, strong fundamentals and robust investor demand. However, caution is warranted due to persistent uncertainty related to trade tensions, fiscal risks and tight valuations. Preference should be given to higher-quality corporate and securitized bonds, which are expected to perform more robustly in Europe’s environment of subdued growth.
In the coming weeks, investors will closely monitor the release of key US economic data, related to the job market, inflation, consumer spending and business investment. This data was delayed by the shutdown, and these reports may significantly influence market trends through year end.