Interest rates on the decline

Economically, the world’s major economies are converging. In Europe, growth is likely to pick up somewhat in the coming months but will probably remain moderate. In the USA, on the other hand, growth will decline. “A sharp economic downturn is not expected in the USA”, says Gerlinger. “However, the latest labour market data can be interpreted as an indicator of a slowdown.”

In both regions, the inflation rate is falling towards the central banks’ targets. Hence, the interest rate peak has probably been reached. The US central bank (FED) has already completed the shift in interest rate policy in its communications: At its December meeting, it pointed to the weaker growth environment and lowered its interest rate projections for the next two years a bit. The European Central Bank (ECB) is taking things a little more slowly. Inflation there has fallen to 2.4 per cent and core inflation to 3.6 per cent. However, the ECB says it wants to wait and see how sustainable the trend is.

“Up to four interest rate cuts of 100 basis points are priced in for the USA from April 2024 onwards. The ECB could follow from June onwards with interest rate cuts of 75 basis points by the end of 2024”, says Gerlinger. The ECB is likely to make this also based on the outcome of the wage negotiations, which will take place in the first half of 2024. The maximum threshold is likely to be at 4.5 per cent.

Due to hopes of monetary easing, the yield curve on the bond market remains inverted. At the same time, the lack of clarity regarding the number of upcoming interest rate hikes in the US has also led to high volatility at the long end. “Due to the very inverted yield curve, the short end is interesting with yields of 4.3 per cent”, concludes Gerlinger. The long end is caught between an expected economic slowdown, a persistently restrictive monetary policy and an expansive fiscal policy. For US corporate bonds, the yield level of around 5.2 per cent is attractive for US dollar investors. The level of US high yields at 7.4 per cent is also interesting. “However”, says Gerlinger, “the interest rate differential to US government bonds does not currently reflect the risk of recession.”

US Treasuries are setting the trend for the European market, prices have risen and yields have fallen. “In addition, a high fear factor is priced into the yields of German government bonds, which in turn dampens the potential for price gains”, explains Gerlinger. Otherwise, interest rates on European government bonds are expected to fall, yet with increased risk in the euro periphery. “We also consider the short end to be more interesting in Europe due to the inverted yield curve”, explains Gerlinger. At around 3.6 per cent, the yield level of corporate bonds with investment status is not really attractive. With about 6.1 per cent, the yield level of high-yield bonds remains interesting, but their spread does not reflect the risk of recession here either.

Generally, Moventum is sticking to its strategy, says Gerlinger: “In terms of duration, we are sticking to around five years and our continued overweight in the credit segment.” As the possible interest rate cuts by the central banks would lead to a decline in yields, particularly at the very short end, the slightly longer duration range of up to two years is becoming more attractive. “Smaller price gains are possible here.”

Additional information is available at www.moventum.lu