Bonds: “Base rates are falling, but yields are rising”

Base rates likely to fall significantly further in 2025

The rise in yields is likely to have been due in part to the statements made by central bank chief Christine Lagarde at the subsequent press conference, where she refused to commit to a further monetary policy course. “Even when asked, she did not hint at a further interest rate cut in January,” states Ulrike Kastens from DWS. Nevertheless, the economist is currently assuming a corresponding interest rate cut at the start of the year. “In our opinion, the ECB should aim for a deposit rate of 2.0 percent for the whole of 2025”. That would be another decrease of 100 basis points from the current level.

For Tim Oechsner from Steubing AG, this is even the minimum of interest rate cuts to be expected in the new year. His justification: “The economic pessimists in the ECB Governing Council now carry a lot of weight”. However, uncertainty remains high because, for example, it is still unclear how the tariff policy of the future US government will affect the eurozone. The experienced bond trader also points to the expectations in the run-up to the fourth interest rate cut as the reason for the strong reaction, which may seem illogical to many at first glance. It is true that the consensus forecast was fully met with the 25 basis point cut. “However, some investors had also speculated on a large interest rate cut,” Oechsner reports. In addition, the volume of demand is relatively low overall due to seasonal factors. “Many trading books are already closed”.

Otto bond sought after About You takeover

In the corporate bond segment, the announced takeover of online fashion retailer About You by industry giant Zalando is generating turnover in a bond issued by parent company Otto GmbH & Co (XS1853998182). “With a little imagination, one could speculate that this bond will soon be repaid early because money will now be coming into Otto's coffers,” explains Gregor Daniel from Walter Ludwig Wertpapierhandelsbank. The bond is currently trading just below par.

The trader continues to see good demand for two bonds issued by the International Bank for Reconstruction and Development. The bond in Brazilian real maturing in 2027 is currently yielding around 12% (XS2934329967), while the bond in Turkish lira maturing in 2036 is even yielding 35% (XS2795696108). On the other hand, a bond issued by the Kingdom of Spain, whose price has risen from 87% to 92% since the middle of the year and will therefore only yield 2.4% until maturity in 2020 (ES0000012F43), is being sold. 

New bond from ArcelorMittal arouses interest

New on the market and directly sought after is a bond from the steel group ArcelorMittal, which currently offers investors a yield of 3.6% after seven years (XS2954183039). The Hochtief bond maturing in 2030 (DE000A383EL9), which is also very popular at the moment according to Oechsner, is at a similar level. Daniel, on the other hand, is still reporting purchases of the bond from engine manufacturer MTU Aero Engines (XS2887896574), which matures in 2031. It currently yields 3.2 percent.

By Thomas Koch, 13 December, 2024, © Deutsche Börse