The US bond market has seen major swings in 2024, with government bond interest rates reaching their highest point in four weeks. However, despite recent signs of strength, analysts at UBS (SIX:) predict that bond interest rates will likely decline by the end of the year, influenced by a number of broad economic factors.
One of the main elements that affect bond interest rates is the inflation rate in the United States. The most recent figures from the Federal Housing Finance Agency show a slight increase in US home prices of 0.1% from the previous month in March, a decrease from the increase of 1, 2% observed in February. Considering the annual variation, prices rose 6.7% in March, less than the 7.1% in February.
UBS analysts note that the weakening housing market and the slowing price trend of new rental contracts suggest that the inflation rate may continue to decline.
“The latest concrete data indicates that we can expect the inflation rate to continue decreasing in the remainder of the year after the positive figures in April,” they mention.
The Federal Reserve’s monetary policy strategy is another significant aspect that could lead to a reduction in bond interest rates. Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, has stated that it is still possible that the Federal Reserve will raise interest rates, but that the general sentiment of the Federal Reserve is to wait.
Kashkari has stated that the probability of the Federal Reserve raising rates is currently very low, which is consistent with recent statements by the Federal Reserve and with the opinion of Jerome Powell, chair of the Federal Reserve, who believes that the next decision The Federal Reserve’s move probably won’t be to raise rates.
“With the labor market weakening and economic expansion slowing, we anticipate that the Federal Reserve will begin to ease its policies in September, reducing interest rates by a total of 50 basis points throughout this year” , the analysts wrote.
Additionally, the UBS team believes that the pace at which the Federal Reserve is reducing its holdings will begin to slow. Starting next month, the Federal Reserve plans to slow the pace of its quantitative tightening measures, which include reducing the monthly limit on sales of US public debt from $60 billion to $25 billion.
This slowdown in quantitative tightening is expected to reduce upward pressure on real interest rates, which should help lower bond rates.
“We believe this will ease upward pressure on real interest rates and lead to a further decline in bond rates,” UBS explained.
In addition, the evolution of the US economy will also play a role. UBS highlights that the world’s largest economy is showing signs of slowing, with the labor market weakening and economic momentum slowing, supporting the case for lower interest rates on bonds as investors look for more investment. safe in times of economic uncertainty.
“We maintain our view that interest rates on US government debt will end the year lower, as both inflation and economic growth slow and the Federal Reserve reduces interest rates towards the end of the year,” they say. the analysts in their report.
“We predict that the interest rate on 10-year US government debt will decline to around 3.85% as the year progresses, reinforcing our favorable stance on fixed income investments,” they conclude.
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