U.S. government bond markets are feeling the squeeze from all sides. Yields on 10-year government debt have dropped in recent weeks amid signs of slowing growth and investors’ reflexive flight to safety following President Donald Trump’s tariff talk. But buyers should beware a false sense of security: blown-up deficits, a major trade war, and something going haywire in tech tycoon Elon Musk’s forceful takeover of U.S. government payment systems all introduce major and sometimes opposing risks, making the future direction of yields hard to predict. The only guarantee is volatility. In the month after Trump’s election victory in early November, yields

… asset and wealth managers around the globe are publishing their investment outlooks for the year ahead. But how serious should investors take these outlooks when thinking about the asset allocation of their own portfolios? Especially as the results from the different outlooks may differ widely. That said, it is good that the outlooks differ, since this means that different economists are not expecting the same market movements across the board. In addition, it might be good to read contrarian views which may challenge expectations and lead to new assumptions for the year ahead. When it comes to this, the

Credit ratings are one of the important measures for bond investors since these ratings are assessments of the creditworthiness of a borrower, such as a corporation, government, or a specific financial instrument like a bond. These ratings are assigned by privately owned credit rating agencies such as S&P Global, Moody’s, Fitch Ratings, or Scope. They indicate the likelihood that the issuer will meet its debt obligations (interest and principal payments) in full and on time. As a result, credit ratings help investors evaluate default risk, guide interest rates, and influence borrowing costs for bond issuers. More generally speaking, ratings range

In the fixed income world investors often talk about “the spread” as one possible driver of returns. But what is “the spread” and why does it exist? Generally speaking, the spread in interest rates which is also called “credit spread” refers to the difference between two interest rates, often between a benchmark rate (normally the interest rate of government bonds) and a specific interest rate on another type of bond (such as corporate bonds). For example, if a 10-year government bond has a 3% interest rate and a corporate bond of similar duration has a 5% interest rate, the spread

Within the current macroeconomic environment where central banks around globe have started to lower interest rates, bond funds and ETFs have become popular investment choices for all kinds of investors. However, their performance is influenced by a variety of risk and return factors that investors need to understand. The first to mention is obviously the interest rate risk. Every investor should bear in mind that bond prices and interest rates move inversely, meaning rising rates can lead to losses, while falling rates increase bond values. A measure to determine the degree of a bond fund’s sensitivity to interest rate changes

Since we have seen a change in investment behavior of European investors between January 1, 2019, and August 31, 2024, with regard to their product preferences in the segment of long-term investment products (Please see the article: “Is there a Change in Investor Behavior in Europe” for more details), it is worthwhile to analyze how much of the assets under management are actively managed and how much of the assets are invested in passive instruments. Since not all long-term asset types (alternatives, bonds, equities, mixed-assets, other, and real estate) are investable with passive products or have significant assets under management,

MicroStrategy’s co-founder Michael Saylor once ran a humdrum little software firm. Then, for a moment, his company was worth many billions of dollars – or, rather, for three moments. After a dizzying rise and fall in the dot-com bubble and another after the pandemic, his company’s shares have now more than doubled this year. This latest spike is tied to a bitcoin-buying binge funded in part by bonds that can convert into stock. Unlike GameStop or other meme-crazed run-ups, though, this one is a dicey deal with Wall Street. The company began hoarding bitcoin in August 2020 and ramped up

April 2024 was another month with healthy inflows for the European ETF industry. These inflows occurred in a further unstable market environment since the geopolitical tensions in Middle East increased over the course of the month. Especially the developments around the Red Sea may impact the economies in western countries, since a number of shipping companies these days avoid the passage of the Suez channel. It is, therefore, to be expected that the prolonged delivery times will cause some tensions for the still vulnerable delivery chains. Market sentiment was further driven by hopes that central banks—especially the U.S. Federal Reserve—have

The current market debate on interest rates has tended to focus only on the money rate of interest, and hence on when the Federal Reserve might start to cut short term rates. The idea is that a cut in rates will make money cheaper and therefore boost equities. Over the last three months, although the five year government benchmark has remained pretty stable, shifting from 4.4% to 4.3%, the five year BBB rate has fallen from 6.2% to 5.7%. This is part of the reason why US equities have outperformed, with the Nasdaq composite index returning 12% in the last

The bond market remains confused about interest rates, which is why it continues to generate such unusual levels of volatility. One possible explanation for this ongoing uncertainty is that there is a fundamental difference of opinion between bond traders who have only experienced abnormal bond market conditions since 2008, and those who are, let’s say, long in the tooth. During the first half of 2023, the US 10 year nominal bond yield averaged just 3.63%, with the 30 year benchmark at 3.78%. The market appeared to be indicating that inflation would quickly fall back to 2% and that nominal demand

Federal Reserve Chair Jerome Powell throughout 2023 has been hawkish on inflation and the need to increase and maintain higher levels of interest rates. The market reaction during the first half of 2023 was that this would trigger a recession, given the view that higher interest rates are not sustainable and will result in an increase in defaults and a subsequent fall in interest rates. This narrative of lower future interest rate levels appears to have been influenced by recency bias and the idea that interest rates need to return to lower levels in order to sustain the economy. This

Markets on the whole do a decent job of synthesizing information at the micro level, but they often get the macro signals wrong as was noted by Paul Samuelson. In his 1998 paper, Samuelson argued that there is no persuasive evidence that macro market inefficiency is trending towards extinction. One factor behind this inefficiency is that markets can progress at times based on memory rather than a random walk. This has particularly been the case for interest rates since the Greenspan Put was put on steroids in 1998 when Long Term Capital Management defaulted. The so-called Greenspan Put is where