Bond market outlook: Interest rate cuts and further yield declines?
A decade of ultra-low interest rates with unprecedented measures by the central banks was followed by explosive yield increases in 2022 and 2023. Last year, the bond markets repeatedly priced in and then priced out rate hikes, recessions, and rate cuts, leading to hefty price fluctuations. At the end of the year, however, a marked uptrend in prices (i.e. a downtrend for yields) crystallised.
Our fund management team for bonds believes that bond prices will most likely increase further over the course of the year, although presumably not at the same pace as in the final quarter of 2023. Naturally, nothing is guaranteed and further price volatility and corrections are possible at any time. The central banks in the USA and Europe have quite clearly communicated significant rate cuts for the remainder of the year, which should lead to falling yields and rising bond prices, and the markets have already priced in a portion of these rate cuts.
However, we still see further price potential. All indications suggest that inflation will continue to fall and will rapidly approach the European Central Bank’s (ECB) target of 2%. You can read more about bond funds below. We also expect global economic momentum to decline in the coming months, but do not currently see any signs of a substantial downturn in the USA or the Eurozone. Europe may see a moderate economic recovery in the second half of the year.
A significant portion of the potential earnings on the bond market will likely come from coupons this year. The bond markets currently offer attractive returns in virtually all maturity ranges and in many market segments, which is a stark contrast compared to the last decade. In fact, the markets are currently characterised by a fairly rare situation in which short-dated bonds are offering slightly higher yields than their long-dated counterparts.
Government bonds from the Eurozone periphery fared better than those from the core countries in 2023. This is not likely to be repeated in 2024. However, the fund management does not expect spreads for the periphery countries versus German Bunds to widen significantly this year.
Bond markets in detail
Rosy prospects for corporate bonds
Bonds undoubtedly had an extremely difficult year in 2022, so many investors had even higher hopes for a positive trend in 2023. And, as it happens, bond investments have indeed gained in value since the start of the year. But what do the next twelve months have in store?
Positive long-term outlook for Emerging Market bonds
In the wake of the rise in US bond yields, Emerging Market bonds have also come under increased pressure since the summer. They had delivered quite attractive performance up until then and offer solid risk-return profiles at the current levels, provided they are selected carefully.
A good time to enter the high yield bond market?
High yield bonds (i.e. bonds from issuers with lower ratings, thus making them riskier) have been a sought-after investment instrument for a long time. And they appear to offer very attractive returns at the moment as well. Is it the right time for an investment in high yield bonds?
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Bond funds
Bond management is one of Raiffeisen Capital Management's longest established core competencies.
Raiffeisen-ESG-Global-Rent: Invest sustainably across the world
Bond investments have enjoyed modest-to-good value growth since the turn of the year, thanks mainly to a significant renewed rise in interest income. But what might happen over the next twelve months, and what are our predictions for the global bond markets?
Raiffeisen-Nachhaltigkeit-Rent: No need to fear the interest rate turnaround
It has frequently been a topic of discussion for years now, sometimes as a source of hope and sometimes as a cause for concern: the “interest rate lift-off”. Now it is finally here and has resulted in massive price and yield movements. Raiffeisen-Nachhaltigkeit-Rent seeks out and takes advantage of opportunities even on these turbulent bond markets.
ESG-transformation of the Emerging Market bond markets
The Emerging Markets present a number of major challenges for investors when it comes to sustainability and ESG-criteria. However, understanding and overcoming these challenges also opens up significant opportunities, both in terms of earnings and promoting a transition to sustainable business practices in the Emerging Markets.
Sustainable profits form the comeback in yields
Raiffeisen Capital Management’s new, fixed-term fund, Raiffeisen-Mehrwert-ESG 2028 II, was starting up in an attractive yield environment, since tangible returns are now possible after many years of zero or negative interest rates. Another positive aspect is that the fund only invests in sustainable enterprises.
Sustainability competence meets bond expertise
Raiffeisen-Euro-Corporates is going sustainable as of 19 September 2022, because the fund will take ESG criteria into consideration starting on this date. There are many good reasons to add sustainability criteria to the decision-making process – including from a risk-return perspective. At the same time, the massive yield increases that have been seen recently open up new return opportunities for investors.
Basics
What are bonds?
Learn more about bonds!
Investing in corporate bonds
Corporate bonds, in particular ones with (very) good ratings, have always been a popular form of investment. The expected return on the bond depends on the creditworthiness of the issuer, because the weaker the creditworthiness, the higher the yield on the corporate bond. Credit ratings by rating agencies help to measure a company’s creditworthiness, and thus also estimate the risk associated with a bond. For example, a rating of AAA denotes the best creditworthiness.
What makes high yield bonds so special?
High yield bonds are bonds issued by companies with lower credit ratings (BB and lower). These bonds normally offer much higher returns than instruments from issuers with strong ratings. This is exactly what makes them so popular for investments – even though the yield advantage is also accompanied by higher risks.
Why Emerging Market bonds?
Emerging Market bonds are bonds issued by companies from the Emerging Markets. These bonds are issued either in the local currency of the country in question or in EUR or USD. These “hard currency bonds” offer yield advantages compared to government bonds issued by euro area core countries or the USA. Local currency bonds feature additional potential as a result of possible currency appreciation (which can also be a disadvantage in the event that the local currency weakens).
Returns – in a nutshell
The return is the amount earned on an investment, expressed in percent, for a full year and pertains to the capital invested. The return is an important measure for the performance and comparison of capital investments. It can refer to the interest income on a savings account, the current yield on interest-bearing securities, or the dividend payments on equities. The return on an investment expected in the future can deviate from the return that is actually generated.
What is duration?
Duration refers to the average capital commitment period of a bond. It denotes the average period of time it takes for the investor to recover the invested capital. The longer the remaining term of the bond, the longer the duration is. However, the duration is generally shorter than the remaining term, as the coupon payments which fall due on the capital during the term reduce the amortisation period. The higher, earlier and more frequent the coupon payments, the more the duration decreases.
What is modified duration?
Modified duration expresses the percentage change in the value of a bond when the market yield changes. It shows the percentage increase in the bond price if the market yield falls by 1% or the percentage decrease in the price if the market yield rises by 1%. The higher the modified duration, the larger the price loss in the case of rising interest rates and the price increase in the case of falling interest rates.
The investment strategy permits the Raiffeisen-Nachhaltigkeit-Rent to predominantly (relative to the associated risk) invest in derivatives.
The Fund Regulations of Raiffeisen-Inflationsschutz-Anleihen, Raiffeisen-Nachhaltigkeit-Rent, and Raiffeisen-ESG-Global-Rent have been approved by the FMA. The Raiffeisen-Inflationsschutz-Anleihen may invest more than 35% of the fund's volume in securities/money market instruments of the following issuers: France, Netherlands, Austria, Belgium, Finland, Germany. The Raiffeisen-Nachhaltigkeit-Rent may invest more than 35% of the fund's volume in securities/money market instruments of the following issuers: France, Netherlands, Austria, Italy, United Kingdom, Sweden, Switzerland, Spain, Belgium, United States, Canada, Japan, Australia, Finland, Germany. The Raiffeisen-ESG-Global-Rent may invest more than 35% of the fund's volume in securities/money market instruments of the following issuers: United States, Japan, Germany, France, United Kingdom.
As part of its investment strategy for Raiffeisen-Mehrwert-ESG 2028 II, six months or less prior to the end of the fund’s term, the management company may mainly invest in sight deposits.
As of October 2023