Data-driven insights and analysis from our investment team every week.
Long-term charts often provide clarity amid short-term noise, offering a clearer perspective on market cycles. The sizeable swings in US and German bond yields since 2023, following the initial surge in rates in 2022, appear on the chart below as a range-bound pattern – a development not always evident in real time or on shorter-term charts. This reflects a deeper tension and uncertainty as markets wrestle with a critical ‘big picture’ question: are we entering a new inflationary era, or will we revert to the benign disinflationary world of recent decades?
Last week’s dramatic shift in European fiscal and defense dynamics has pushed long-term euro borrowing rates to the edge of their historical uncertainty bands, though they have yet to break into uncharted territory. Still, the situation feels reminiscent of the aftermath of former European Central Bank President Mario Draghi’s famous “whatever it takes” moment in 2012, suggesting such a breakout remains possible. Notably, European yields have scope to narrow the gap with US yields – a divergence that emerged during the euro debt crisis and has persisted ever since.
Over the past nine months, we’ve argued that bond investors are well positioned to fare better in the years ahead, as rising uncertainty compels markets to compensate fixed-rate lenders more generously. Barring a new economic demand shock, there is little reason to believe this dynamic has run its course.
