Bonds: "Fed minutes shake up bond markets"

Actually, the matter seemed clear. The interest rate hike by the U.S. Federal Reserve at the end of July was supposed to mark the peak. Subsequently, discussions focused on the timing of the first interest rate cut. That has changed again after the results of the latest Fed minutes published on Wednesday. The markets are struggling with rising bond yields.
 

18 August 2023. FRANKFURT (Börse Frankfurt). The Bloomberg index for the total return on global government bonds climbed this week to 3.3 percent, its highest level in 15 years. Bond rate hikes in Norway and Russia are seen as a finger pointing toward other regions that the period of rising interest rates is not over. Strategists at Bank of America warn that we should be prepared for the return of the "5 percent world" that last existed before the global financial crisis.

Fittingly, yields on ten-year U.S. Treasuries also reached their 2008 high. The move was triggered by the statement taken from the Fed minutes that "Most participants continued to see significant upside risks to inflation, which could necessitate further tightening of monetary policy." According to the much-watched Fed Funds Futures, the probability of another rate hike by November subsequently rose again to about 40 percent.

Escape to safe havens

For Tim Oechsner of Steubing AG, it is slowly becoming clear to investors that interest rates will remain high for a long time before the central bank even considers the first interest rate cuts. Klaus Stopp, bond trader at Baader Bank, observes a certain uncertainty in the market. "We are in a phase of reorientation, as there are different opinions regarding central bank policy." The discussion about possible interest rate hikes, also in the U.S., is starting again in any case.

Since the problems in China (weak consumer demand, real estate and banking crisis) are also weighing on the market, there is a typical "flight to safe havens," according to Stopp. Demand is particularly strong for short-dated Federal Republic of Germany paper. With the Federal bond (DE0001104867) due in December with an annual yield of 3.4 percent, the trader sees quite strong trading. The same is true for comparable paper maturing in October (DE0001141786) and January (DE0001134922). Although the yields are not enough to compensate for inflation, they are "better than nothing," says Stopp.

Yield pick-up with corporate bonds

In corporate bond trading, Oechsner continues to see good demand for paper with a maximum maturity of seven years. "Especially three- to five-year bonds with 1,000 denomination, at least 3 percent yield and a good name are being bought." As examples, the bond specialist cites, among others, two bonds from Porsche (XS2615940215) and Deutsche Telekom (XS1382791975) maturing in 2028, which yield 4 percent and 3.3 percent, respectively.

There is also interest in a bond issued by carmaker Mercedes-Benz (DE000A3LH6T7), which matures in May 2026 and yields 3.6 percent. Even 4.6 percent yields beckon on a bond issued by competitor Volkswagen (XS2374594823), which, however, will also not be repaid until early 2030. "Investors buy the securities as a yield pick-up and leave them until final maturity," reports Oechsner.

At Baader Bank, there are isolated speculative purchases on a floating rate bond of Südzucker (XS0222524372). Here, there is a payment every quarter in the amount of the 3-month Euribor plus 3.10 percent p.a.. The bond has no maturity date, but can be called and redeemed by the issuer at par on a quarterly basis under certain conditions. The bond is currently trading at just under par.

By Thomas Koch, August 18, 2023 © Deutsche Börse AG