The 2024 bond vintage is overpriced

This was to be expected. The unprecedented “rally” that took the US T-Note yield from 5% to below 3.8% between the end of October and the end of December 2023 gave way to a correction in the first week of 2024. The rebound in yields observed during the first sessions of the new year broke the bullish trend that had taken US equities close to, or even beyond, previous all-time highs. Market exuberance at the end of the year overcame the “January effect”, which postulates seasonal gains at the beginning of the year.

The yield curve in dollars disinverted slightly as a result of an increase in long-term yields. These upward pressures are the result of economic news that does not argue in favor of a rapid and aggressive easing of monetary policy in the USA. The employment report published last Friday once again highlights a robust labour market. The establishment survey showed a 216,000 payroll increase in December, well above expectations. The unemployment rate, based on a household survey, was unchanged at 3.7%. Behind these headline figures, however, we can see a gradual cooling. Weekly working hours fell in December, and private-sector job creation slowed significantly in the fourth quarter. All in all, the employment report is consistent with a “soft landing” for the US economy.

The latest ISM surveys convey a mixed message. The manufacturing sector index edged up from 46.7 in November to 47.4 in December, but remains in contraction territory. More worryingly, the drop from 52.7 to 50.6 in the services index could reflect a break with the positive surprises that emerged in 2023. Erratic and unreliable, this indicator is far from justifying a precipitous turnaround in monetary policy. In this respect, the minutes of the last FOMC meeting tend to confirm that interest rates will not be raised any further, but they do not provide any details on the outlook for expected rate cuts in 2024.

The inflation figures expected on Wednesday will give us a clearer picture, but we’ll probably have to wait until spring for the Federal Reserve to unveil its roadmap more clearly. For the time being, the aggressive reversal expected by some strategists seems speculative and poorly supported by macroeconomic developments. With this in mind, the outlook for bond performance (combining expected return and risk) is subdued, even though the Fed’s tightening cycle is probably over.

In Europe, euro-denominated yields have also started to rise again. The 10-year German Bund recovered to around 2.2%, after falling to 1.9% on December 27. The upturn in the economic sentiment index and the latest inflation figures should comfort the ECB in its wait-and-see stance. Excluding energy and food, annual inflation continued to fall, to 3.4% in December, but the 0.4% monthly rise does not argue in favor of rapid easing. Outside the eurozone, sterling and Swiss franc yields conformed to the general trend, as prospects for interest rate cuts were reassessed.