Niall McDermott on tidal shifts in the 2024 bond markets

There are around 779 beaches in the UK (Marine Conservation Society). So, whether it’s walking the dogs, braving the waves, channelling your inner ‘Baywatch’, or smothering sun cream as war paint, the UK’s beaches bring people together to experience blue nature in their own way.

For the younger (or indeed young at heart) individuals rummaging around the cupboard for a bucket and spade, the sense of anticipation for a beach day ahead is palpable.

For bond markets, 2024 opened with a similar sense of enthusiasm for the year ahead. The words emanating from Fed Chair Powell, sat high on the lifeguard tower, were that it was safe to swim – inflation was falling, and growth was slowing but not significantly enough to cause concern. In other words, rate cuts were coming soon. Market participants were riding the same wave, judging the economic waters to be just right and that the US economy would have a goldilocks “soft-landing”.

We then saw the first shift in tides. The yellow warning flag went up. After a spell of economic data that surprised on the hotter side, including a major upside surprise in US non-farm payrolls, central bankers were quick to cool market expectations of rate cuts. It was also clear that the story was not the same on distant shorelines; the euro area was experiencing a significant weakening of growth, while the UK was showing signs of slowing but struggling with stubbornly high inflation leading to fears of stagflation.

This continued through the middle of the year as markets ebbed and flowed following US economic data that flip flopped between weaker prints of GDP growth and forward-looking indicators before rushing back to strength. Essentially this created a rocky ground for investors that were facing a turbulent geopolitical landscape as tensions were rising in the Middle East. Bond prices suffered, and thus yields rose, as a result of inflation fears while uncertainty ran rife as around 50% of the world’s population hit the polls to vote in elections.

As we reached the back end of the year, lessons on not overreacting to individual data prints were largely ignored by market participants. Central bankers also showed a lack of order with Fed Chair Powell more akin to practising the Cha-Cha slide than giving clear guidance to markets. Post his comments on “now being the time to cut rates” the Federal Reserve had to switch to a more cautious stance countenancing a pause in rate cuts soon after they had started.

Politics also became a key focus. A gamble by French president Macron failed and instead highlighted the absence of fiscal discipline and France’s unsustainable budget deficit and debt to GDP ratio. This consequentially led to a successful no-confidence vote in the government and a failed budget. Prime Minister Michel Barnier became the shortest serving PM in the history of the Fifth Republic in the process. The stalemate is still ongoing. Investors, however, voted with their feet, divesting away from French bonds and spreads between France and Germany widened significantly.

In the UK, we also saw political change with the Labour party coming to power and promising change. Their budget, however, quickly lost favour with businesses and calls of broken promises were levied at this new government. Finally, in the US former president Trump and his Republican Party won a clean sweep election of the White House and both chambers of Congress and was quick to begin stirring the waters with talks of tariffs and unconventional choices for key cabinet positions. Fears of inflation impacts are at the forefront of investors’ minds going into the new year whilst announced stimulus from China looks too shallow and troubled waters still lie ahead.

With the year drawing to a close, one of the things we ask ourselves is what are the lessons learnt. Firstly, we would want to highlight that investment is all about finding the signal through the noise, investors have been easily swayed by the new shiny data print to then be left disappointed on the next one. This is not our approach. On Marlborough’s bond desk we focus on investing through the cycle, that involves ascertaining the thematic picture and weighing up what is priced in. We’ve said it before and will say it again, and again – we are value investors. This ultimately means that we are judging the bigger picture through a probabilistic lens and our analysis suggests that we are in a late cycle environment, where risky assets appear priced for near-perfection and as such we are positioned defensively because that is where the value is.

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This article is provided for general information purposes only and should not be construed as personal financial advice to invest in any fund or product. These are the investment manager’s views at the time of writing and should not be construed as investment advice. The opinions expressed are correct at time of writing and may be subject to change. Capital is at risk. The value and income from investments can go down as well as up and are not guaranteed. An investor may get back significantly less than they invest. Past performance is not a reliable indicator of current or future performance and should not be the sole factor considered when selecting funds.