Chart of the Week
Since the start of the year, market rates have risen across all maturities following a fall at the end of 2023. Why? Because markets have sharply adjusted their central bank rate cut expectations. While the consensus at the end of 2023 was for six Fed rate cuts and seven ECB rate cuts in 2024, current expectations are nearer to three rate cuts each.
OUR ANALYSIS
At the end of 2023, the market jumped ahead of itself on rate-cut optimism. The reaction was fuelled by inflation figures indicating that disinflation had begun, and Fed Chair Powell’s dovish messaging being interpreted as the green light for a Fed rate cut in March. Since then, central banks have managed to talk down expectations by insisting that it is still too soon to declare victory over inflation. Rates have risen across the entire yield curve, at both the short and long ends.
Although rising interest rates have weighed on bond markets since the start of the year, carry has provided a cushion to absorb some of the impact. Meanwhile, spreads on high yield and subordinated issuance narrowed, with high yield remaining on the uptrend that emerged in 2023.
For money market assets, the current backdrop is good news: market consensus sees the segment’s attractive returns – around 4% in the eurozone – lasting until the middle of this year.
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Written on March 01, 2024. This is not an investment advice. Opinions subject to change.
See also: https://latribune.lazardfreresgestion.fr/en/eurozone-inflation-remains-lofty/
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