Data-driven insights and analysis from our investment team every week.
In this week’s Investment Viewpoint, we discussed the performance of European fixed income and how government bonds from the euro area have underperformed their US counterparts in recent weeks. The driver of this move has been a recent repricing of rate-cut expectations.
At the end of last year, markets anticipated up to seven cuts of 0.25% from the European Central Bank (ECB) by the end of 2024. The main driver of this enthusiasm was the progress seen in inflation, particularly US inflation over the final quarter of 2023. However, at the start of this year, the progress which markets had become accustomed to for inflation failed to keep pace with the track record of 2023, leading to doubts around the ability of central banks to cut rates this year.
One can see from the chart below that between January and April of this year markets moved from expecting roughly six-to-seven cuts of 0.25% from the ECB to expecting three-to-four cuts of 0.25%. This change in expectations pushed rates and yields higher, leading to negative price performance for European assets. Similar but more significant changes in expectations were seen in US markets, leading to the underperformance of US fixed income relative to European fixed income year to date.
However, in recent weeks, better PMI and growth data across Europe has sparked another shift in rate cut expectations in Europe. Markets now expect closer to two cuts by the end of the year rather than three-to-four. This change in sentiment has driven a short-term underperformance for European fixed income relative to the US.
This is a marketing communication.
