Eurozone bond yields saw a slight increase following the European Central Bank’s decision to cut interest rates by 0.25 percentage points on June 6. This adjustment in the market was a response to the uncertainty surrounding the future direction of monetary policy. Fixed-income managers are now advising investors on where they should focus their portfolios following the first interest rate cut in five years.
Giacomo Calef, the country head for Italy at NS Partners, noted that bond yields across various maturities rose slightly after the ECB announcement. This suggests that the normalization of monetary policy may take longer than initially anticipated, despite Christine Lagarde’s confidence in inflation decreasing.
The yield on the benchmark 10-year Italian BTP rose to 3.87% from 3.83%, while the German Bund with the same maturity increased to 2.56% from 2.53% immediately after the rate cut announcement.
When interest rates decrease, government bond yields typically fall, and the prices of existing bonds rise. However, the market response to this rate cut was relatively subdued, with more focus on the upward revision of inflation estimates. This revision could lead the central bank to proceed cautiously with further rate cuts throughout 2024.
Investors are now advised to consider two factors. Firstly, the impact on liquidity, as returns from deposit accounts and money market instruments are expected to decrease due to lower interest rates. Some experts recommend reducing liquidity in portfolios as holding liquid assets becomes less appealing.
Secondly, the inverted yield curve in the eurozone, where 10-year government bonds offer lower yields than two-year bonds, should be considered. This inverted curve, typically a recession indicator, is now signaling differently according to Andrea Conti, head of macro research at Eurizon.
Looking ahead, bond managers are already making adjustments to their portfolios post-rate cut. While some prefer medium and short maturities and peripheral debt, others have a more global perspective on fixed income investments.
Overall, the consensus seems to be that medium-term bonds and high-yield investments may benefit from potential rate cuts in the future. Investors are advised to keep the bigger picture in mind and consider the structural changes in interest rates post-pandemic when making investment decisions. The Benefits of Regular Exercise
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