Bonds: Tense wait for new statements from ECB and Fed

This week, traders on the bond markets have positioned themselves for the upcoming central bank meetings. The outlook from the ECB and the Fed is being eagerly awaited. Meanwhile, many investors are taking advantage of the largely attractive conditions for corporate bonds to build up new positions.
 

21 July 2023. FRANKFURT (Börse Frankfurt). At Wednesday's meeting of the U.S. Federal Reserve, a further key rate hike of 25 basis points seems to be a foregone conclusion. However, this could be followed by a pause. "Most market players assume that the rate hike cycle will end after the July hike," reports Tim Oechsner of Steubing AG. According to the much-watched Fed Funds Futures, the probability of another rate hike by November is only 35 percent. At the same time, the first rate cut is already priced in for spring 2024.

Robust US labor market dampens interest rate euphoria

Against this backdrop, yields on ten-year U.S. bonds had recently fallen significantly after reaching a high of over 4 percent two weeks ago. However, this trend was halted on Thursday. The surprising decline in weekly jobless claims to a two-month low pushed yields up from 3.74 to 3.85 percent. According to Commerzbank, the once again robust labor market could lead to the Fed raising key interest rates more than market participants currently expect.

The ECB is also unlikely to raise high hopes

In the euro zone, the yield on ten-year Bunds barely changed on a weekly basis. Over the course of the last few days, however, there was a change in trend here as well. After the decline to below 2.3 percent, it went up again to 2.45 percent in the second half of the week. Commerzbank reports that at the ECB meeting on Thursday (increase of 25 basis points is also considered safe here) is now to be expected after all with a rather hawkish appearance. "The ECB does not want September to be seen as a turning point in the monetary policy cycle," Deutsche Bank underpins this thesis. Accordingly, President Christine Lagarde is likely to try to put a damper on discussions about a rate cut in the near future. Analysts also believe that a further increase to 4.0 percent in September cannot be ruled out.

Yields of around 3 percent are popular

In corporate bond trading, interest in securities with a maximum term of five years and a denomination of 1,000 remains high if the yield that can be achieved with them is at least in the 3.0 range. According to Tim Oechsner of Steubing AG, for example, a bond on Porsche (XS2615940215), which matures in 2028 and currently yields 4.0 percent, as well as bonds from SAP (DE000A13SL34) and Volkswagen Financial Services (XS2374595044), both of which mature in 2027 and offer investors yields of 2.8 and 4.1 percent, respectively, at maturity, are in demand.