Horizon Q4│2024 - Bonds
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In a nutshell
Safe government bonds with a positive third quarter, but price potential exhausted.
Market technology supports European corporate bonds, we favour the more defensive investment-grade segment.
Local currency bonds from emerging markets with untapped potential, attractive entry opportunities.
Joint upward trend unlikely to last
The third quarter brought investors in large parts of the bond market falling yields and thus pleasing gains. For the coming weeks and months, however, we do not expect a continuation of the unified upward trend in bond prices, but rather a return to the heterogeneity of the first half of the year. In this respect, the differentiation between individual bond sectors is likely to become more important again.
Safe government bonds: recent tailwinds fade again
After two negative quarters, the picture for safe government bonds has recently turned around – from July to September, increases in value were recorded. In comparison, US Treasuries in particular stood out in local currency terms and have now shown a clearly positive balance since the beginning of the year. In addition to increased demand for security, which characterised the market in the second half of July, during the temporary stock market correction at the beginning of August and again at the beginning of September, the ongoing disinflation process benefited the government bond segment. The German inflation rate fell to 1.9% in August compared to the same month of the previous year (or 2.0% on an EU harmonised scale), falling below the 2% mark for the first time since March 2021. Inflation also fell across the eurozone and in the US, meaning that hopes of further interest rate cuts provided additional support for government bonds. As yields at the short end have fallen significantly more than at the long end, the yield curves are almost flat again, at least when looking at 10-year and two-year maturities. Much now seems to have been priced in, and in our main scenario we expect yields to rise again in the longer maturity segment. Positive income from carry could therefore be partly cancelled out by price movements in the opposite direction.
Safe government bonds: moderate returns until mid-2025
Past and expected performance of 10-year government bonds, overall effect of yield/price change, coupon yield and roll-down effect
Forecasts: Key interest rates and government bond yields (in %)
Berenberg and consensus forecast in comparison, values at mid-year 2025 and at year-end
Corporate bonds: technology trumps valuation
Euro-denominated corporate bonds are still ahead in 2024: the investment-grade segment has gained 3.2%, while high-yield bonds have even risen by 5.9%. Also, the segment should remain supported by technical market factors for the rest of the year. Corporate balance sheets are solid and the majority of the latest quarterly results do not show any signs of gloom due to the risk of a recession, which still cannot be completely ruled out. At the same time, the issuing markets are heading for a new record year: a net total of EUR154bn euros has already been placed amid brisk demand. Investor appetite appears to be high, with fund inflows in both the investment-grade and high-yield segments indicating growth of almost 10% in this asset class according to JP Morgan. Only when it comes to valuation is there less confidence. In many segments, risk premiums can only be described as fair by historical standards. Assuming that the market continues as it is, this should not be a problem, but rather technical support should dominate. However, a heated US election campaign and possibly weak macroeconomic data could disrupt this picture and herald a correction. We remain cautious and continue to favour corporate bonds, albeit in the more defensive investment-grade segment rather than the high-yield segment.
Corporate bonds: HY risk premiums historically unattractive
The risk premiums in the HY segment are no longer a reason to buy, whereas in the IG segment they are at the level of the historical median
Emerging markets: local currency bonds with catch-up potential
While there was still speculation about a possible interest rate hike in the US in the spring, the conviction that a cycle of interest rate cuts would begin in September prevailed during the third quarter. The weaker labour market and inflation data underlying this change of heart also influenced the market for emerging-market securities. Until April, the contributions of the interest rate component to performance were still negative, but the effect then reversed by mid-September (+4.9 % in the hard currency segment, +1.4 % in the local currency segment). It is striking that local currency bonds have not yet been able to realise their full potential despite favourable conditions. We see the reasons for this firstly in the fact that emerging-market central banks have initially held back with aggressive easing in view of the uncertainty surrounding US interest rate policy. Secondly, a possible election victory for Donald Trump could change the environment for emerging markets. This uncertainty is likely to persist until the presidential election on 5 November. Thirdly, surprising statements from Brazil and Colombia have led to concerns about rising budget deficits and sell-offs in their respective local currency bonds. However, we consider these movements to be exaggerated. In the long term, valuations should return to a fundamentally justified level, meaning that there are currently interesting entry opportunities. We therefore continue to favour local currency securities over their hard currency counterparts and consider the former to be the most attractive asset class within the emerging markets due to their risk/return perspective.
Emerging markets: local currency bonds have catch-up potential
5-year US yields have fallen much more sharply since June compared to yields on duration-like EM local currency bonds (in %)
Conclusion: opportunities in corporate and emerging market bonds
After an unexpectedly good third quarter, safe government bonds have become less attractive looking ahead. In the event of a soft landing of the US economy, yields in Germany as well as US and UK bonds are likely to rise again in the medium term, resulting in price losses that will fully or partially erode the carry. Despite no longer favourable valuations, corporate bonds are well supported by market technology and should continue to perform better in the absence of a significant economic downturn. In view of the potential risks, however, we favour the defensive investment-grade segment over high-yield bonds. In emerging markets, our favourites remain local currency securities, which have not yet fully exploited their potential. This could change in the coming months.
Authors
Martin Mayer
Martin Mayer, CEFA, has been working as a portfolio manager since 1998. Since November 2009, as Senior Portfolio Manager at Berenberg, he has been responsible for the pension strategy of private asset management and for individual special mandates. After completing his training in business administration (Wirtschaftsakademie) and his degree in economics (University of Hamburg), he joined Deutsche Bank's asset management department in 1998. Until 2008, he managed individual client portfolios for Private Wealth Management and completed further training as a CEFA investment analyst/DVFA in 2001/2002. Mayer joined HSH Nordbank in the summer of 2008 as Deputy Head of Portfolio Management.
Martin Mayer
Senior Portfolio Manager Multi Asset
Wei Lon Sung
Head of Fixed Income Emerging Markets
Christian Bettinger
Christian Bettinger, CFA, has been with the company since June 2009. As fund manager of the mutual funds Berenberg Euro Bonds and Berenberg Credit Opportunities, he is responsible for the selection of corporate bonds in the Multi Asset area. After apprenticeship as a banker and studying business administration at the Catholic University of Eichstaett-Ingolstadt, he first went through the trainee program at Berenberg. In February 2010, the business graduate was taken over early as a junior fund manager with a focus on derivatives and fixed income. Bettinger is a CFA-Charterholder, Certified Financial Engineer (CFE) and admitted Eurex trader.
Christian Bettinger
Head of Fixed Income Euro & Emerging Markets
