Bonds: “The spectre of inflation is back”

Falling inflation, falling yields - this is far from a foregone conclusion, especially in the USA. Fed Chairman Powell triggered a shock wave there this week. This also caused yields to shoot up in this country. 
 

December 20, 2024 FRANKFURT (Frankfurt Stock Exchange). Cold shower on the markets: The fact that US Federal Reserve Chairman Jerome Powell held out the prospect of fewer interest rate cuts at the Fed meeting on Wednesday hit the stock markets hard and caused bond yields to rise significantly - in the US, but also here in Germany. As expected, the central bankers lowered key interest rates by 25 basis points to between 4.25 and 4.5 percent. However, they are now forecasting only two rate cuts for 2025, compared to four in September. The central bank's inflation forecast at the end of the year had “collapsed to a certain extent”, explained Powell. It will now take much longer for inflation to reach its target of 2 percent. “The spectre of inflation is back,” commented bond trader Arthur Brunner from ICF Bank.

Interest rate cut: “Train moving at a much slower pace”

As Jan Holthusen from DZ Bank reports, the US money market is currently only pricing in a little more than one interest rate cut by the end of 2025, and around three steps down before the meeting. “Interest rates are being lowered, but the train is now moving at a much slower pace,” says Tim Oechsner, who trades bonds for Steubing AG. The yield on ten-year Bunds is at 2.3 percent on Friday morning, well above the level before the Fed meeting and even higher than the 2.05 percent at the beginning of December. US Treasuries of the same maturity are yielding 4.55 percent, compared with a low of just 4.13 percent a week and a half ago.