Four areas for fixed income investors to watch heading into year end
September 24, 2024
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3 min read
There seems to be little debate that we are likely heading into a rate cutting cycle. How do you see things playing out from here?
The increase in global interest rates, which began in the first quarter in 2024, continued through the first half of the quarter before stabilizing in Europe and partially reversing in the US during May and June. As expected, the ECB pivoted by reducing its key interest rate by 25 basis points1. and it is anticipated that further cuts will follow. In September, the Fed initiated its first rate cut, in line with market expectations. Based on current information, we now expect additional cuts from both central banks over the coming months, with the possibility of further reductions by next summer.
How positive are you about the prospects for investors going into the end of this year?
We can’t see any specific risks directly linked to the macro-economic situation, but there are four areas that we are watching closely because, we believe, they could pose a greater threat in the medium to long term.
The first of these is inflation. We do not think that inflation is a risk in the short term any longer, but because of factors such as the energy transition, growing resource scarcity, war, and populism, among others, the risks of higher and more unstable inflation than markets have grown accustomed to remains a possibility over the medium to long term.
The second is volatility. Since the beginning of June, political events have generated the most volatility in financial markets. Budget revisions have often revealed larger deficits than previously anticipated, and election results create high levels of anxiety. As such we expect to see an increase in volatility against a backdrop of political uncertainty – especially as we head closer to the US election in November.
The third factor we are keeping an eye on is closely related to the other two and that is the possibility that central banks may be more hesitant to make monetary policy decisions and thus markets will be less able to predict them. If there is one thing we know, markets hate uncertainty. Therefore, this in turn could feed into more volatility within markets.
The final factor on our list relates to debt. It is a topic we have spoken about at length and it remains a concern and not just to us. As you can see from the chart below, a number of significant markets now boast a fiscal deficit greater than 3% of GDP2.
