Source: Golden Ten Data

According to the latest estimates from foreign media, after the Federal Reserve, the European Central Bank, and the Bank of England jointly raised interest rates by 1,475 basis points, it may only be reduced by 575 basis points by the end of 2025.

The latest economic outlook is changing the investment landscape after the US released a series of disappointing high inflation data and better-than-expected economic activity. It provides more time to lock in current relatively high yields, and since some central banks will ease monetary policy before the Federal Reserve, it also provides an opportunity to bet on relative value.

Foreign media's macro yield model in November last year showed that the 10-year US Treasury yield will close at 4.1% at the end of the year. As of this Thursday, the model shows that the 10-year US Treasury yield should be 4.4%, a slight decrease from the current 4.65%.

According to the economist Ana Galvao, who constructed the model, “the downturn in inflation data at the end of 2023, and the subsequent upward accident in February,” is a major reason for this difference.

Anne Walsh, chief investment officer at Guggenheim Partnership Investment Management, said that changes in monetary policy are always difficult to grasp, but the serious damage caused by the pandemic and large-scale fiscal stimulus measures not seen since spring 2020 have made it more difficult to seize this opportunity.

She said, “All the historical rules that existed in the past have been extended. For example, the period from when the Federal Reserve starts raising interest rates to the beginning of the recession has been delayed, which is usually 18 to 24 months.”

Walsh, who manages more than $300 billion in assets, said that as the fiscal deficit continues to be at an all-time high, the task of pulling the inflation rate back to 2% has become more complicated. She pointed out that it is not normal to have a huge deficit when the unemployment rate is below 4%.

Walsh said that she is very optimistic about investment-grade bonds and believes that potential credit fundamentals are good, and yields of around 5.5% to 6.5% are very attractive. As of Thursday, the Bloomberg US Composite Index yielded 5.75%.

The outlook for the Fed to cut interest rates in the derivatives market has also changed. It is expected that the Fed will only cut interest rates by 25 basis points this year. Some options traders are even preventing the possibility that the Fed will raise interest rates again.

Interest spreads between major central banks are also widening. On February 1, the market hinted that the interest rates of the Federal Reserve and the European Central Bank at the end of the year would be 3.97% and 2.52%, respectively. As of Friday, the market also believes that interest rates for the two are 4.96% and 3.20%, respectively.

The European money market showed greater confidence in this year's easing policy. As of Friday, the market believed that the ECB and the Bank of England's easing during the year were 69 basis points and 43 basis points, respectively.

Steven Barrow, head of G10 strategy at Standard Bank in London, said, “Compared to Europe, there is less downside risk in US interest rates.” He told his clients to be optimistic about German treasury bonds rather than US treasury bonds.

Continued economic flexibility has led the IMF to believe that the economies of advanced economies will accelerate rather than slow down this year, which should allow major central banks to continue to shrink their balance sheets, which expanded rapidly during the COVID-19 crisis.

The Federal Reserve, the European Central Bank, the Bank of England, and the Bank of Japan expanded their balance sheets by a total of $9 trillion in 2020 and 2021. Foreign media currently expect that by the end of next year, these central banks will implement quantitative austerity policies totaling about 3 trillion US dollars between 2024 and 2025, even after the Federal Reserve indicated that it is inclined to slow the pace of quantitative austerity by about half.

This means that private sector investors will need to step up the supply of government debt, and higher long-term bond yields may make this process easier.

According to Anwiti Bahuguna, chief investment director responsible for global asset allocation at Northern Trust Asset Management (Northern Trust Asset Management), it is worthwhile to invest in the credit sector in the current environment.

Northern Trust, which manages about $1.2 trillion in assets, predicts that the Federal Reserve will cut interest rates at most twice in the second half of this year, and is investing heavily in US high-yield bonds, and expects the Federal Reserve to successfully reduce inflation without disrupting the economy. Bahuguna said in an interview:

“We are very neutral in all asset classes except high-yield assets. High-yield bonds should perform well. Despite slowing economic growth, they are still strong, so the risk of default is low.”