July 19, 2024

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Investors bet on déjà vu all over again

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Year-ahead outlook season is upon us again and the déjà vu vibe is strong. This time last year, investors and analysts were busy telling the world about their key convictions about 2023. Chief among them: the US was heading for a recession and the historic decline in government bond prices was over. 

Now, you’ll be shocked to hear the key message for 2024 is that (sure, we got it wrong last time, but hear us out): the US is heading for recession and the historic decline in government bond prices is over.

The main tweak to the refrain is that in general the elusive recession is expected to be on the mild side — a slowdown rather than the so-called “hard landing,” the horror show that was widely expected at the start of this year. But most agree that next year will be the point when higher interest rates finally start to bite, boosting the allure of safe assets such as government debt. They really mean it this time.

Getting this call right is crucial not just to the bond market, but to all the other asset prices that use bond prices as an anchor. Analysts and investors are quick to admit this crucial task has thrown them off-course this year. 

“Last year we saw a scenario that bonds are back,” said Vincent Mortier, chief investment officer at Amundi, Europe’s largest asset manager, at its outlook event this week. “We were a bit early.”

Just as investors were expecting a decline in bond yields, the market administered a beating. Benchmark 10-year US government bond yields swept up from a low point this year of about 3.3 per cent in April to 5 per cent in late October — the highest point since before the financial crisis. 

Broadly, the consensus got its inflation call right. The pace of price increases in most major economies has declined sharply. But the peculiarities of the US mortgage market, in particular, mean that…

2023-11-25 00:00:16

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