If 2023 was a two-sided year for the bond market, 2024 began with a real bond rush. The biggest players have been government bonds: last week's syndicated placement of two Btp bonds alone saw record demand that mustered 155 billion euros in requests.
At the same time, between new issues and the announcement of exploratory mandates, the rush to the bond market by Italy's largest financial, industrial and banking groups (from Generali to Enel from Mediobanca to Bper) has in fact also restarted. Paradoxically, the abundant supply of new issues has cooled bondholders' enthusiasm while the return of flare-ups in Europe and geopolitical unknowns (with reporting from the Red Sea) could complicate the central banks' rate-cutting march.
To understand what is going on, we need to look carefully at what happened during the year just ended and then chart the outlook for the current year. Until October, yields continued to rise, touching the highs of the year: 5 percent for the 10-year Treasury and 3 percent for the Bund. In the last 2 months of 2023, bonds reversed the trend, posting significant declines: the 10-year Treasury ended the year below 4%, the Bund fell as low as 1.8%. "The turnaround was dictated by central banks, which left rates unchanged at their last meetings in 2023 and hinted at the possibility of starting to cut them later this year. Investors have thus abandoned the idea of 'high rates for a long time' and have enthusiastically embraced an aggressive rate-cutting scenario, as many as 7 in the next 12 months for the Fed, with the first one given almost for certain as early as the March 20, 2024 meeting," comments Paolo Baldessari, Head of Fixed Income & Alternatives, Asset Management Area at Banca Generali.
What are the biggest risks at this stage for bond markets? The expert notes that the central bankers' worst nightmare is to see inflation rise again. And that is what happened in Europe last December when, as a result of higher energy prices, inflation rose from 2.4 percent in the previous month to 2.9 percent, thus interrupting a continuous downward phase that had lasted since October 2022, the month in which the "historical" peak in inflation (+10.6 percent) was recorded. "Rising commodity prices, not just energy, cannot be ruled out given the rekindling of the Israeli-Palestinian conflict, which is triggering a domino effect against all countries tactically affected. The Red Sea, where 30 percent of international maritime traffic transits, serves as the main stage for a trade crisis that touches global interests," Baldessari adds. Guerrilla warfare by Yemen's Houthi rebels is forcing major shipping companies to suspend their routes and circumnavigate the African continent, increasing shipping time and costs. According to the most recent estimates, nearly 90 percent of containers that used to transit the Red Sea have been diverted to a longer route of more than 7,000 km.
It is not surprising, then, that in the early days of 2024 investors moved more cautiously in bond markets, realizing some of the gains made at the end of 2023. In addition to future inflation dynamics, also cooling bondholders' enthusiasm was the high supply of new issues, both public and private. "This trend is set to continue throughout 2024," the manager further notes: according to Bloomberg Intelligence, governments will have to place more than $2 trillion of new debt, 7 percent more than last year. Particularly challenging is the issuance schedule for the U.S. government, which will have to finance an "electoral" deficit of 6 percent of GDP, more than double the historical average. Still strong, however, is the appetite for Italian government bonds, as shown by the boom in investor applications for the first two bonds placed by the Ministry of Economy and Finance in recent days.
Paolo Baldessari, Head of Fixed Income & Alternative, Asset Management Area at Banca Generali
The turnaround was dictated by central banks, which left rates unchanged at their last meetings in 2023 and hinted at the possibility of starting to cut them later this year. Investors have thus abandoned the idea of 'high rates for a long time' and have enthusiastically embraced an aggressive rate-cutting scenario, as many as 7 in the next 12 months for the Fed.
