Knowledge. Shared Blog

October 2019

Bond Markets at Inflection Point as Economic Outlook Remains Unknown

Co-Head of Strategic Fixed Income Jenna Barnard explains why she feels bond markets are at a critical inflection point and which factors she expects will determine the outlook going forward.

Key Takeaways

  • A year ago, bond markets were pricing in rate hikes; today, they are pricing in substantial interest rate cuts as global economic growth has slowed.
  • The key question is whether the current downturn becomes more serious by spreading to the consumer and service sectors, which could lead to swift, aggressive action by central banks.
  • The direction and extent of the downturn over the next three to six months will determine the outlook for bond markets going forward.

View Transcript

Jenna Barnard: Since March, we have obviously seen the complete capitulation of global central bankers into interest rate-cutting cycles. We have seen the U.S. economy start to get dragged down into this global manufacturing downturn that has been going on for well over 18 months.

But at this point, we are [in] a really interesting phase, [an] inflection point. Last October, we believe we were at the peak of inflation, peak of growth and markets were pricing in rate hikes. It may well be that we are now about to enter the kind of bottom in terms of the rate of change of growth.

The reason I think we may be at an inflection point is some of the global manufacturing data, which is starting to show signs of bottoming out. Some of the lead indicators, which we look at, which suggest that this global downturn may come to an end, or the worst of it may come to an end, in the next three to six months. And the question now really is whether that spreads to services sectors and crucially to employment markets. Because if it does spread to employment markets, central banks will respond very quickly and even more aggressively than we have seen.

Job openings have been rolling over for a number of months. The question is whether that then translates into actual unemployment. So, we are at an interesting inflection point. Bond markets have done a great job at hedging equities, at pricing in this slowdown in growth and inflation, but the question now is whether this slowdown is mostly over, or whether it now becomes more serious by spreading to the consumer and services parts of the economies.

From a cyclical perspective, it now pays, I think, to avoid getting too bearish, too recessionary in your focus and potentially to anticipate the bottom of the cycle, much as we did with the top of the cycle 12 months ago.

Our structural view on economies, on the macro view, has not changed. If anything, it has become more cemented in the last 12 months. We have always argued that interest rates would not rise to the extent that consensus anticipated, that in fact if this interest rate divergence into the developed world was to resolve, it would be through U.S. interest rates coming down, not the rest of the world seeing interest rates rise.

The cyclical inflection point is now very interesting, and how we traverse the next three months, or perhaps six months, will determine the outlook for bond markets going forward.

Knowledge. Shared
Blog

Back to all Blog Posts

Subscribe for relevant insights delivered straight to your inbox

I want to subscribe