Bonds: "Yields on the decline"

Significantly falling yields have characterized the course of the week on the bond markets so far. Today's labour market data from the USA is even more in focus than ever in the current environment. There is particularly strong demand for shorter maturities in trading.
 

2 August 2024. FRANKFURT (Börse Frankfurt). Down with yields and up with prices - that is the current picture for most bonds. This week, the yield on ten-year US government bonds fell below the 4.00% mark for the first time since February. At the end of April, it was still 4.70 percent. Conversely, bond prices rose by 2.2 percent in July, the highest level since December.

The meeting of the US Federal Reserve further fueled the downturn in yields. Although Fed Chairman Jerome Powell left key interest rates unchanged, in the opinion of Deutsche Bank he gave "dovish signals regarding a rate cut in September". This is now 100% priced in on the futures markets. Two more interest rate cuts of 25 points each are expected this year.

Greater focus on the labor market

After Powell signaled on Wednesday that the US Federal Reserve would increasingly include the labour market in its deliberations alongside inflation, the data published in this area will now be particularly in focus. The fact that the number of initial jobless claims rose to its highest level in almost a year last week, together with disappointing ISM data on the manufacturing sector, caused yields to fall further yesterday.

However, the analysts at NordLB do not expect the labor market data due today at 2:30 pm to be weak. "The acute labor shortage observed in the USA in the recent past is likely to ensure that companies will remain very cautious when it comes to downsizing," the strategists explain. The consensus forecast for July is 185,000 newly created jobs (after 206,000 in June) and an unchanged unemployment rate of 4.1%.

Return to "normality" expected

In bond trading on the Frankfurt Stock Exchange, securities in the short-term segment are particularly sought after. Tim Oechsner from Steubing AG assumes that many investors are expecting a return to a "normal" yield curve, not least due to central bank interest rate cuts, and are therefore positioning themselves at the "short end". The yield opportunities there are currently (still) comparatively high. For example, an RWE bond (XS2523390271) with a good twelve months to run and a Mercedes-Benz bond maturing in August 2026 (DE000A289XJ2) are being purchased. Both bonds currently yield around 3.3 percent.

Klaus Stopp from Baader Bank cites the political tensions in the Middle East, which are leading to a "flight to safe havens", as a possible reason for the recent development on the bond markets in addition to the interest rate cut fantasy. Short-dated bonds are also in high demand here. For example, there is keen interest in a Goldman Sachs bond maturing in March 2025 (XS2149207354), which offers a yield potential of 3.4 percent. However, slightly longer-dated securities such as the Fresenius bond (XS2178769159) maturing in May 2030 with a yield of 3.2 percent are also being purchased. In the course of its restructuring, the hospital group recently presented forecasts that were positively received by the analysts' guild.

From Thomas Koch, 2 August 2024, © Deutsche Börse