Convictions

Bonds’ appeal with Central Banks at a turning point

Explore opportunities in fixed income as central banks are taking actions

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We believe the world economy is likely to grow by 3.2% in 2024, but we are noticing diverging dynamics: growth is decelerating in the US while the Eurozone is showing signs of recovery, and, unlike China, India maintains its robust growth performance.

In line with this, we are observing differences in monetary policies between emerging markets (EM), the US and Europe.

Key EM central banks are well advanced in their policy easing, while developed countries have just begun or yet to start. Indeed, the European Central Bank (ECB), the Bank of England (BOE) and lately the Federal Reserve (Fed) have all started cutting rates over the summer.

Therefore, declining price pressures and expectations of rate cuts in developed markets allow us to confirm our stance on duration in fixed income.

Government bonds offer good value from a strategic long-term perspective as central banks embark on an easing cycle. We also think that, in light of a mild economic deceleration in the US, selected sovereign issuers could provide diversification. In an overall active and flexible approach, we are neutral on duration in the UK. In core Europe, our stance has evolved positively as we expect the ECB to progress on its easing trajectory.

In the credit space, as a result of the upcoming rates cut, we expect the demand from investors seeking high-quality corporate bonds and longer-maturity investment solutions to continue in H2. We mainly favour investment grade with a preference for European credit due to its attractive valuations, although we remain cautious on lower-rated names in the high yield space. The latter could suffer from risks generated by stickier-than-expected inflation and potentially higher-for-longer rates.  

All in all, we believe that the trading range in yields experienced over the past 2 years is over, and we are moving towards a new phase with rates starting to move lower. Over the coming months, a positive view on duration and the steepening of the yield curves are our main convictions in fixed income.

Central Banks rates and forecasts Source: Amundi Investment Institute as of 20 September 2024. CB Forecasts are by Amundi Investment Institute and are as of 20 September 2024. Fed: Federal Reserve, ECB: European Central Bank, BoE: Bank of England, BoJ: Bank of Japan. For the Federal Reserve, current rate refers to the upper bound of the target range. For the BoJ, current rate refers to the upper bound of the target range. For the ECB, current rate refers to the deposit facility. -0.15 0 0.15 0.3 0.45 0.6 0.75 0.9 -1 0 1 2 3 4 5 6 7 2020 2021 2022 2023 2024 2025 % % Fed ECB BoE BoJ (RHS)

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Date of publication: 27 September 2024
Doc ID: 3895158

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