(Finance) – Government bond issues accelerate in the 1st quarter. Placements have reached around 400 billion eurosequal to over 30% of the total expected for the year. Year-to-date net issuance is very high, with over 175 billion of Euro. Even considering the ECB’s QT (Quantitative Tightening), almost 35% of the net volume of issues has already been placed on the market. This is what a Generali Investment report finds, according to which the acceleration of sovereign bond placements is justified by a revision of interest rate expectations.
More cautious central banks
“At the end of 2023 – explains Florian Spate, Senior Bond Strategist, Generali Investments – the financial markets were still expecting rate cuts benchmark of more than 150 basis points by the Fed and by more than 160 basis points by the ECB through 2024. Since then, forecasts have been reduced to around 75 basis points (Fed) it’s at less than 90 basis points (ECB). The correction of exaggerated rate cut expectations led to a notable rise in yields on both sides of the Atlantic in the first quarter.”
What to expect
For Generali Investments experts, “in the coming months returns will remain within a range rather narrow corridor. Since i returns are currently at the upper end of the trading range, we expect a slight decline in the future. Overall, for the next three months we expect the 4.15% for US 10-year yields and the 2.30% for Eurozone 10-year yields“.
“Longer term, we see more potential for declines, particularly for US yields: our 12-month forecast for 10-year US yields is 3.85%.”
Elements of caution
However, there are elements that advise caution. “Self Trump will become the next president of the United States and will impose duties – explains Spate – this will slow down growth, but above all it will cause inflation to rise. With inflation expectations rising and a Fed watchful, the decline in yields will be smaller than in the baseline scenario. If the Republican majority in Congress allows a rise in the budget deficit that offsets the growth-slowing effect of tariffs, U.S. yields could even move sideways from current levels. In this case, market participants should prepare for higher inflation expectations and a higher forward premium.”
Expectations for the Eurozone
The spread of non-core government bonds in the euro area they continued to shrink during the favorable market context. Despite the levels achieved, we do not expect a significant widening of spreads in the short term
“The aforementioned decline in volatility of the bond markets, a modest one economic recovery and the next ones rate cuts of reference of the ECB” – it is underlined – “provides a significant technical support to non-core government bonds in the euro area. Compared to other risky fixed income asset classes, non-core EA government bonds do not appear overvalued and low spread volatility implies risk-adjusted spread levels are still quite attractive.”
“With no catalyst for a sustained trend reversal in sight, we recommend investing in non-core euro area bonds to benefit from the favorable market environment and gain carry,” concludes the analyst.