Bonds are back (as we predicted). Here's what to do now

THE FED INAUGURATES THE NEXT CYCLE OF RATE REDUCTIONS FOR ALL CENTRAL BANKS IN 2024 In unsuspecting times, at the beginning of September, I wrote an article on the progressive decline of the US 10-year yield below 4% by the end of December 2023 You can read it here, as well as in the mid-September article on the opportunity not to be afraid of the Fed and to trust in the progressive decline in inflation and interest rates.
Well last night, surprisingly, the Fed Governor used a very condescending tone and opened up the possibility of three rate cuts in 2024 and four rate cuts in 2025, according to the interview panel with members of the Board of Governors of the Fed (the so-called Dot Plot of the Federal Reserve).
But the market believes in more aggressive cuts.
The yield on the US 10-year bond therefore fell – at the end of official trading – below 4%, to exactly 3.95%.
Looking at the Bloomberg graph below, at least graphically, there is room for a further decline in the 2033 Treasury yield to 3.5% by the spring of 2024.
The bond rally is therefore halfway.
All this, i.e.
the robust rally of the bond market, had been widely discounted in the articles by myself on Money.it, in articles such as "Which BTPs to invest in now?", "Too much unjustified volatility on BTPs: an opportunity to buy" and Markets, opportunities (and risks) with rising interest rates.
Is it time to bring home the profits? Not yet.
We are halfway through the bond rally, as mentioned above.
Be patient and you will see the price of your 4.5% 2053 BTP or that of the 5% 2040 BTP, which I advised you to buy months ago, rise even further.
Graphically, the destiny seems to be a return to the 3.40%-3.60% area, highlighted in the band parallel to the x-axis, highlighted in the graph.
In short, it seems that the markets have entered a new paradigm of inflation and much lower yields for 2024, while the global geopolitical order is fragmenting, and while the increase in the risk of recession is becoming increasingly pressing at the global level.
world.
And so that means bonds are back.
The problem was 2022: in that year monetary and credit conditions were tightened perhaps excessively and in too short a time and created a problem of national interest for global economies, increasing the risk of a growth shock adverse for the next year – 2024 – which the markets were not fully prepared to face.
Inflation in the United States is now expected to fall more than expected and the Federal Reserve's target of 2% by the end of 2024 or beginning of 2025 is within reach.
Also in light of the fact that the headline consumer price index data of all other major economies are set downwards, to the point that even the other central banks can now be confident of reaching their inflation targets over the next year .
Today, December 14, Lagarde did not deviate much from the do-good approach on inflation, lowering the ECB's estimates for 2024.
This gives me hope for our 30-year BTPs, which still have a long way to go upwards in their prices.
I still remain convinced – as mentioned before – that the BTP 4.50% October 2053, if you bought it at 90 at the end of October and see it at 103 today, is not to be sold.
Just like the BTP 5% 2040, which was worth 98 at the end of October and today is worth 110, has room for another 8/9 points to rise.
The same goes for the 2032 Bund or 2033 Bonos.
Analysts expect the Fed to start cutting rates in the second quarter of 2024 and continue to cut more than 100 basis points over the rest of the year.
Many also anticipate that the European Central Bank will follow the Fed and that the Bank of England will start a cutting cycle, but will remain behind its "competitors" (Fed and ECB in this case).
An unstoppable process of disinflation is underway.
And it will be more severe in the EU than in the US.
Be careful, this process will not be painless from a social point of view.
We believe that further disinflation is likely to come at the price of rising unemployment in Europe and the UK, while depleting pockets of consumer savings (accumulated in the Covid era), tighter credit conditions for businesses and households and conditions weak labor markets could indicate a possible recession in 2024 in the euro area.
This is why it is not irrational to even hypothesize deflation in the euro area by the end of 2024, which is a more serious and profound process than disinflation.
The rapid tightening of monetary policy by central banks in the last two years, in fact, is driving global markets towards a "new paradigm" in which bond market interest rates will fall sharply, even if we will never return to the of negative ECB rates.
DISCLAIMER The information and considerations contained in this article should not be used as the sole or primary support on which to make investment decisions.
The reader maintains full freedom in his own investment choices and full responsibility in making them, since he alone knows his risk propensity and his time horizon.
The information contained in the article is provided for informational purposes only and its disclosure does not constitute and should not be considered an offer or solicitation to public savings.