Gov Sovereigns/Treasurys

Yesterday, the ECB solidified its recent dovish tilt in response to weaker growth and decreasing inflationary pressures. It is now set to cut rates 25bps each meeting. How low will the ECB deposit rate ultimately go and what does this imply for yields and the euro?

In this Insight, we assess whether investors should expect fiscal turbulence in the UK, that will drive UK yields higher and the pound lower.

We give our thoughts on this morning’s CPI release and (lack of) market reaction. We also close our short position in January 2025 fed funds futures.

Our Q3 portfolio was defensive, which we believe will be the appropriate stance in the next six-to-twelve months. Data coming out of the US has remained robust which could cause US bond yields to temporarily overshoot. An overshoot in US bond yields will be an opportunity to dial up the portfolio’s defensive tilt. The average decline in 10-year Treasury yields 12 months after the first Fed rate cut is 100 bps. This time should be no different. There are not many changes to this quarter’s portfolio allocation. We have upgraded UK gilts to overweight and downgraded European credit to underweight. Portfolio duration remains the same. In terms of future changes, we are generally watching the trend in inflation given many central banks are delivering jumbo rate cuts. Any pause in the disinflationary trend we have seen will send bond yields soaring. This is a risk to our view. Otherwise, a recession in the first half of 2025 will cement our long duration stance.

This report looks at the likely path for the dollar and bond yields over the next 6-to-12 months.

The bond market priced out a lot of recession risk after this morning’s employment report, and the 10-year Treasury yield has moved back into the Soft Landing Zone. We assess the data and consider whether we need to change our cyclical positioning.

Our Portfolio Allocation Summary for October 2024.