Economy

The past few years haven’t been easy for bond investors, as the “safe haven” asset has struggled in both sunny and cloudy markets. This raises an important question: Is it time to ditch the traditional 60/40 portfolio in favor of something more dynamic?During 2024, global bonds delivered a paltry total return of -2%, while global equities were up 18%. And in 2022, when global equities recorded an annual loss of 18%, bonds offered little downside protection, falling by 16%.Bonds’ limited utility in recent years is due to three key factors: correlation, volatility and curvature.First, bonds help offset portfolio risk when the correlation between bonds and equities is negative. During the five years leading up to March 2020, the height of COVID-related market turmoil, bonds and equities were negatively correlated almost 60% of the time, when calculated on a rolling 120-day basis. Since then, however, equities and bonds have been negatively correlated less than 10% of the time. Next (LON:NXT), fixed income volatility needs to be low in order for bonds to smooth out returns in a diversified portfolio. But average fixed income volatility, as commonly measured by the MOVE index, has almost doubled since 2022 when the Fed started hiking interest rates, and it hasn’t normalized despite recent rate cuts. When bonds are choppier, they can’t easily serve their function as defensive anchors in diversified portfolios.Given that each of these three factors can move significantly due to changes in growth, inflation, interest rates and other monetary policy actions, the classic strategy of maintaining a static 40% allocation to bonds appears seriously flawed.Bond investors may want to instead consider taking a more dynamic approach, continually assessing the current environment and shifting their bond allocations accordingly.FINDING BOND PROXIESHere is another challenge: Many investors want to use bonds to express their views on the trajectory of interest rates, essentially the cost of money, which obviously plays an important role in driving investment outcomes.But if bonds’ tepid returns and inconsistent hedging benefits turn off capital allocators, what other strategies are available?One option is to invest in companies with interest-rate sensitive equity valuations, such as many major technology companies (e.g., Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT) and Amazon (NASDAQ:AMZN)). These firms habitually generate growth well ahead of the broader economy. A company’s valuation is the sum of all future profits discounted to the present at the applicable discount rate. The higher the expected growth rate, the more sensitive the equity valuation is to changes in discount rates.Moreover, when interest rates fall during periods of soft economic growth, large tech equities often attract so-called “bottom fishing” investor interest because of their highly defensible business models, relative non-cyclicality, and consistent cash flows.As a result, these equities have bond-like characteristics, even though they typically generate returns well in excess of what an investor could expect to earn in investment grade credit.Another way for investors to gain some of the benefits of bonds without capping their upside is by investing in companies whose businesses are interest-rate sensitive.Banks, for instance, typically profit from higher interest rates and steeper yield curves because they capture the difference, or net interest margin, between sticky short-term deposit rates and market-adjusted long-term lending rates. In contrast, homebuilders benefit from lower interest rates. When borrowing costs are lower, mortgages become more affordable, boosting demand for new housing.But investing in equities in these industries obviously isn’t just an interest rate play. Investors also gain exposure to fundamental growth drivers in these sectors. For example, an investor in banks could potentially benefit if the incoming U.S. presidential administration supports more accommodative banking regulations, while an investor in homebuilder equities could enjoy capital appreciation due to the chronic undersupply in the U.S. residential housing market.These additional sources of return mean that, compared to pure bond strategies, investing in the equities of interest-rate sensitive industries can potentially offer a larger margin of error if the interest rate call goes wrong, provided investors have a proper understanding of the particular industry and company.Investors should thus consider injecting more dynamism into their bond strategies and also questioning whether the best way to access some of the traditional benefits of bonds may by investing in a different asset class altogether.(The views expressed here are those of the author, a portfolio manager and creator of the “Thematically Thinking” newsletter at Fidelity International.) More

(Reuters) -U.S. stock index futures fell on Monday as yields surged after robust payroll numbers last week bolstered expectations that the Federal Reserve will maintain a hawkish stance for most of 2025.At 07:21 a.m. ET, Dow E-minis were down 107 points, or 0.25%, S&P 500 E-minis were down 45.25 points, or 0.77% and Nasdaq 100 E-minis were down 243.25 points, or 1.16%.Futures tracking the domestically sensitive Russell 2000 index declined 1.1% to their lowest since September 2024. The index fell more than 2% into correction territory on Friday, when the payroll numbers were released, from the intraday high it had touched in late November.Wall Street’s fear gauge hit a more than three-week high on Monday.Wall Street’s main indexes logged their second consecutive week of declines in the previous session after multiple better-than-expected reports, including one on employment and another on services activity, raised expectations that inflation could be running high in the world’s largest economy. Investors also priced in the likelihood that the incoming Donald Trump administration’s policies – such as tariffs and a clampdown on illegal immigration – could threaten global trade and fuel price pressures at a time when the U.S. Federal Reserve has also signaled a cloudy outlook for monetary policy. Trump is expected to take office on Jan. 20.After an initial spike, yields on longer-dated Treasury bonds are pinned at multi-month highs. [US/]Interest-rate futures are now reflecting just 26 basis points worth of cuts by December this year, according to data compiled by LSEG.”The robust labour market, along with the recent pickup in inflation, are both making it difficult for the Federal Reserve to justify further rate cuts,” David Morrison, senior market analyst at Trade Nation said in a note.”Inflation had already started to creep up again, even as the Fed cut rates by a bumper 50 basis points in September – something that looks like a serious policy mistake, compounded by additional cuts in November and December,” Morrison said. The Consumer Price Index figure and the central bank’s Beige Book on economic activity, both due on Wednesday, could help investors gauge the central bank’s policy outlook.The risk-off stance hit megacaps, which have led much of the rally in U.S. stocks over the last two years. Tesla (NASDAQ:TSLA) slid 2.9%, Amazon.com (NASDAQ:AMZN) dropped 0.9% and Alphabet (NASDAQ:GOOGL) lost 0.6% in premarket trading.Chip stocks such as Nvidia (NASDAQ:NVDA) dropped 3.1%, Advanced Micro Devices (NASDAQ:AMD) fell 1.7% and Broadcom (NASDAQ:AVGO) lost 2.5% after the U.S. government said it would further restrict artificial-intelligence chip and technology exports.Among others, Moderna (NASDAQ:MRNA) slid 17% after cutting its 2025 sales forecast by $1 billion, hurt by the slow launch of its respiratory syncytial virus shot and weak demand for COVID-19 vaccines.Major lenders JPMorgan Chase & Co (NYSE:JPM), Wells Fargo (NYSE:WFC), Goldman Sachs and Citigroup (NYSE:C) are due to report earnings on Wednesday. More

LONDON(Reuters) – Emerging market countries and companies have issued a flood of bonds topping $55 billion, the most in years, as borrowers rush to lock in cash before the potential tumult of the second Donald Trump administration in the United States.Saudi Arabia sold a whopping $12 billion in bonds last week, Mexico $8.5 billion and Chile more than $3 billion, along with Slovenia, Hungary, Indonesia, Estonia and a string of companies.Many of them were issued at zero premium over existing bonds, while euro-denominated debt was also back in vogue. Morgan Stanley (NYSE:MS) calculations show a total of $55.5 billion in issuance year to date, the most in more than a decade, and well above last year’s $44.6 billion. “Borrowers want to be at the front of that issuance wave,” said Stefan Weiler, head of CEEMEA debt capital markets at JPMorgan. Weiler said borrowers were coming “en masse and in size” to issue roughly another $30 billion in debt sales ahead of Jan. 20, when Trump’s inauguration could spark volatility, and ahead of the U.S. Federal Reserve meeting at the end of the month, which could signal changes to its interest rates plans. Trump’s aggressive promises to place additional tariffs on China threaten economies across a swathe of emerging countries – chiefly China but also commodity exporters like Chile and Brazil. His penchant for unpredictable policies also tends to rattle markets.But nascent re-inflation fears in the United States – and blockbuster jobs growth – is adding fire to the bellies of those who need to raise money. “There’s this re-inflation narrative that kind of spooks the market,” said Nick Eisinger, co-head of emerging markets fixed income with Vanguard.”Overall risk-free yields therefore have to go up. And therefore the starting point in terms of countries wanting to do new issues gets more expensive.”BULLDOZER ROLLS ONEmerging market issuance last year was already like a “bulldozer,” according to BNP Paribas (OTC:BNPQY). Matt Doherty, head of CEEMEA syndicate at BNP Paribas, said this is continuing. Those who needed cash were funding well in advance in 2024 to avoid the “slipstream” of U.S. election-induced volatility. Now, with the market recalibrating from expectations of as many as five rate cuts from the U.S. Fed down to potentially just one, there was more reason to front-load issuance. “I wouldn’t be surprised if you have another first half where we see the best part of $200 billion in issuance from CEEMEA,” Doherty said, referencing last year, when 70% of emerging market debt raised was in the first six months of the year.”There isn’t really any reason for people to wait.”Thus far, the average new-issue premium has also been between 0 to 10 basis points (bps), compared with 15 to 20 bps early last year. Several borrowers, including Chile, the Hong Kong Airport Authority and Hungary, paid 0-5 basis points, Doherty added. But high yields compared with recent years prompted some sovereigns, such as Saudi or Indonesia, to opt for shorter-term bonds rather than their usual 30-year sales.An unusually high number of issuers – including Chile, Indonesia and Hungary – also offered euro-denominated bonds to make use of lower yields in the bloc. COVID DEBTS AND FEAR OF THE FEDAdding to funding needs are nearly $500 billion of redemptions in emerging markets due this year, according to Paribas data, as short-term debt issued in 2020 during the COVID-19 pandemic comes due. Bank of America’s David Hauner said the COVID-era debt repayments meant that outside the Gulf countries, net issuance would be lower than last year. Total (EPA:TTEF) issuance for companies, corporates and other emerging market entities this year, he said, would be around $567 billion. But as many as possible, he said, would issue early, due also to fears that the U.S. Fed could even hike rates again. While that is not a Bank of America expectation, Hauner said it would be “very brutal for fixed income.” “It’s the most dangerous scenario for EM credit,” he said. Thus far, the market has easily absorbed the issuance. Deals are oversubscribed, and every issuer is raising the money they target. But Citi, in a note, said risks are high – and the market could shift quickly.”All the current support for EM credit is bound to be short-lived” Citi’s note said. More

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BofA’s Economics team stated that the Fed’s “cutting cycle is over” after stronger-than-expected December payroll figures prompted concerns about inflationary pressures. The key question now is the threshold for future rate hikes. According to the analysts, “the bar is high since the Fed still thinks rates are restrictive.” However, they suggest that rate hikes could be back on the table if “year-over-year core PCE inflation exceeds 3%” or if “inflation expectations become unanchored.”The impact of rising U.S. Treasury yields is also a point of focus. Since the end of September, 5-year UST yields have risen by 100 basis points, reflecting a robust U.S. economy and persistent inflation, which has kept the Fed on pause rather than cutting rates further. BofA notes that while the elevated yields could slightly worsen credit quality, particularly concerning commercial real estate re-pricing, widespread credit deterioration is unlikely if the job market remains strong and GDP growth stays within the 2-3% range.However, they believe the scenario changes if the Fed is compelled to resume hiking rates to combat inflation. In this case, BofA warns that investors may start pricing in a higher likelihood of a U.S. recession, which could negatively impact bank stocks due to expectations of rising credit defaults.BofA advises focusing on the “three Rs”—Regulatory relief, Rate backdrop, and Rebounding customer activity—as drivers for bank stock performance in 2025. They highlight Wells Fargo (NYSE:WFC) and JPMorgan as well-positioned among money centers, with Goldman Sachs and Morgan Stanley (NYSE:MS) offering exposure to a potential rebound in investment banking. More

VIENNA (Reuters) – Austria’s far-right Freedom Party and the conservative People’s Party said on Monday that after three days of coalition talks they had reached a deal on bringing the budget deficit back within the European Union’s limit.They gave few details.The eurosceptic, Russia-friendly Freedom Party (FPO) came first in a parliamentary election in September with about 29% of the vote but was not tasked with forming a government until a centrist attempt to do so without the FPO collapsed a week ago.The first order of business in its coalition talks with the People’s Party (OVP) was how to bring the budget deficit back within the EU limit of 3% of economic output to avert a so-called excessive deficit procedure by Brussels.”We have taken a fundamental decision and developed a joint roadmap to avert an EU excessive deficit procedure against Austria,” FPO leader Herbert Kickl said in a statement after a press conference with OVP leader Christian Stocker.Weak growth in the economies of important trading partners including neighbouring Germany and consumers holding back on spending helped push Austria into a second year of recession last year, denting the country’s tax take.The budget deficit is expected to come in at 3.7% of gross domestic product in 2024 and 4.2% this year if no corrective action is taken, according to economic think-tank Wifo which provides forecasts the government relies on.Kickl and Stocker said they had agreed on mainly spending-related measures to save about 6.3 billion euros ($6.4 billion) this year, or about 1.7% of the GDP currently forecast by Wifo.”What I can rule out is an increase in taxes for the masses, so no increase in value-added tax … no increase in the fuel tax, nothing being taken back, so to speak, in the area of corporations tax,” Kickl said, adding that tax privileges and loopholes would also be addressed.A table issued by the OVP showed the biggest item was a 3.2-billion-euro reduction in subsidies, followed by a 1.1 billion euro “contribution to stability by ministries” and 950 million euros in “other measures”. It did not elaborate. “Adjustments to the tax system” amounted to 920 million euros.Both parties said they would hammer out the figures in greater detail and present them to the public at a later date but caretaker Finance Minister Gunter Mayer would now inform the European Commission of the agreement.($1 = 0.9804 euros) More

The rise in UK yields started with the rise in US yields after the US election, with the UK-specific concerns coming into focus only last week, analysts at UBS said, in a noted dated Jan. 13.The budget, with its business-focused tax rises, managed to shatter already fragile confidence. In 3Q24, growth fell short of expectations. And this weakness is likely to continue in the near term. However, the bigger problem, the Swiss bank added, was the decision to leave very little fiscal headroom in case things don’t turn out as planned, as has now happened with these higher yields.The additional cost of servicing the UK national debt puts the Chancellor’s fiscal targets when the Office for Budget Responsibility publishes them for the Spring Statement, something Rachel Reeves may have to address.The Chancellor has (for now) ruled out tax rises in the spring, so spending cuts it is. But this may not be as easy as it sounds. The signature piece of the budget was the sharp increase in public spending (which is why there is no headroom, despite large tax rises), and is the chancellor really prepared to reverse some of this? Or is it just a case of promising to do more in the future—on top of already “ambitious” plans for paring back spending growth over the remainder of the parliament? “I suspect the chancellor will opt for the latter, but whether investors buy this or not is an open question,” UBS added.That said, “recent events do give me greater conviction that the Bank of England will not sit on the sidelines. Higher borrowing costs, which are flowing into the real economy, are tightening financial conditions. Inflation pressures are present but fading, so a cut in February, with more later this year, remains the base case.” More

WASHINGTON (Reuters) – U.S. President-elect Donald Trump campaigned on promises of aggressive import tariffs, strict immigration curbs, deregulation and smaller government, but the economy he inherits next week may be screaming for something different.Namely, don’t break anything.With output expanding above trend, the labor market near maximum employment and adding jobs, and the embers of inflation still smoldering, Trump may be launching his promised reforms into an economy less in need of the sort of stimulus his 2017 tax cuts provided. As a stock selloff following last week’s strong December jobs report showed, it may also be prone to correction given high asset values and a bond market that has been moving yields higher. “Success for the Trump administration would be to do no harm to the exceptionally performing economy it is inheriting,” said Mark Zandi, chief economist at Moody’s (NYSE:MCO) Analytics. On their face, the planned combination of tariffs, deportations, and deficit-funded tax cuts “will do harm. How much … depends on how aggressively these policies are pursued.”           Trump will take office next week under far different economic circumstances than when he started his first four-year term in 2017.”The constraints are different, starting with inflation,” which is not yet fully controlled from a pandemic-era spike and has shown little year-over-year improvement in recent months, said Karen Dynan, a Harvard University economics professor and former Obama administration official. Trump also faces larger federal deficits and higher government borrowing costs than before, and a labor force that has grown faster than expected because of immigration, something Trump wants to curtail. Referring to recent U.S. performance that has outstripped that of other developed nations and surprised many economists, Dynan said that “if you believe the economic growth in excess of trend is from immigration, it is going to be hard to get numbers as large as we saw in the latter part of the Biden administration.”NEW LANDSCAPE When Trump first entered the White House in 2017 the economy had been growing steadily since the end of the 2007-2009 financial crisis, but the pace was often sluggish and employment had not fully recovered. There was room for the boost Trump’s signature Tax Cuts and Job Act provided, and while the import tariffs that followed dealt a blow to the global economy, the U.S. proved largely resilient.What had been the longest U.S. economic expansion in modern times ended only when the COVID-19 pandemic began in March 2020. Inflation was a distant concern back then, seemingly anchored below the Federal Reserve’s 2% target. Homebuyers could find 30-year fixed-rate mortgages at around 4%, and the government was financing its operations with long-term Treasury bond rates at around 3%.Today, inflation is stingily hanging above the Federal Reserve’s target, mortgage rates are nearing 7%, and 30-year Treasury yields are around 5% and rising, a fact that may reflect market doubts about whether inflation is contained and about U.S. financial discipline going forward.”There is still a concern inflation may not be beaten … We are going to fix that problem, so don’t worry about it,” Fed Governor Christopher Waller said last week of rising long-term bond yields. But “the other thing getting more and more attention is the concern about fiscal deficits … If that does not seem to change going forward, at some point the markets are going to demand a premium … That is starting to be what we are seeing.”While Trump has created an informal Department of Government Efficiency to find savings, there’s no plan to address the major deficit drivers: health and retirement benefits for seniors that both political parties consider sacrosanct.’PERFORMING VERY, VERY WELL’If government borrowing costs and the vigilance of bond markets pose one potential set of constraints for Trump, the state of the economy could pose another.The major data that Fed staff and officials watch, including figures on employment, inflation, consumer spending and overall growth, may not offer much room for improvement without risks.The unemployment rate in December was 4.1%, for example, near or below many estimates of what’s considered sustainable without generating inflation, and the economy gained an impressive 256,000 jobs. With wages growing, consumer spending remains healthy. Inflation is drifting lower but is still more than half a percentage point above target, with concerns that it could be reignited by any aggressive move to boost output that may already be exceeding potential or by added costs from things like tariffs.”The U.S. economy is just performing very, very well,” Fed Chair Jerome Powell said in a Dec. 18 press conference at the end of the central bank’s last policy meeting. “We have to stay on task, though,” with monetary policy remaining tight enough to return inflation to 2% while keeping the job market intact.Between Trump’s plans and the economy’s strength, there’s growing doubt about whether the Fed will be able to cut rates much further, if at all.The uncertainty about what’s ahead is rooted in the gap between Trump’s expansive rhetoric about what he seems to think the economy needs and the actual economic performance over the last year in particular.The Fed’s meeting last month saw staff beginning to suggest slower growth and higher unemployment may be the immediate result of expected trade and other policies. Policymakers publicly have highlighted the uncertainty they are dealing with while also attempting some balance.Noting that businesses themselves have been optimistic about upcoming conditions, despite possible disruptions from tariffs and deportations, “I expect more upside than downside in terms of growth,” Richmond Fed President Tom Barkin said last week even as he also acknowledged possible inflation risks.And, Barkin said of the incoming administration’s likely policy initiatives, “you could walk some of them back if they prove to be damaging.” More