Eurozone
bond
yields
rose
modestly
after
the
European
Central
Bank
(ECB)
cut
interest
rates
by
0.25
percentage
points
at
its
June
6
meeting,
as
markets
adjusted
to
the
uncertain
future
path
of
monetary
policy.
Fixed-income
managers
explain
where
investors
should
be
focusing
their
portfolios
now
after
the
first
interest
rate
cut
in
five
years.
“After
the
ECB
announcement,
we
observed
a
slight
rise
in
bond
yields
across
the
maturity
curve,”
Giacomo
Calef,
country
head
for
Italy
at
NS
Partners.
“This
indicates
that,
despite
Christine
Lagarde’s
confidence
that
inflation
will
come
down,
the
process
of
normalising
monetary
policy
may
be
longer
than
expected.”
Immediately
after
the
announcement
of
the
rate
cut,
the
yield
on
the
benchmark
10-year
Italian
BTP
rose
to
3.87%
from
3.83%
and
the
German
Bund
with
the
same
maturity
rose
to
2.56%
from
2.53%.
Bonds:
What
to
Look
For
Now
Generally,
when
interest
rates
fall,
government
bond
yields
tend
to
fall
and
the
price
of
outstanding
bonds
rise.
But
the
market
reaction
was
relatively
muted
to
the
first
cut
since
2019.
The
focus
was
more
on
the
upward
revision
of
inflation
estimates,
which
could
make
the
central
bank
more
cautious
in
cutting
rates
for
the
rest
of
2024.
“The
cut
is
balanced
by
hawkish
components
such
as
the
upward
revision
of
growth
and
inflation
estimates
(which
will
therefore
take
longer
to
come
back
towards
target),
as
well
as
the
absence
of
any
reference
to
embarking
on
a
more
continuous
path
of
reducing
the
cost
of
money,”
said
Alberto
Biscaro,
portfolio
manager
at
Quaestio
SGR.
Staying
Liquid
Now
Pays
Less
Investors
need
to
consider
two
factors,
experts
say.
The
first
is
liquidity,
because
income
from
deposit
accounts
and
other
money
market
instruments
is
set
to
fall
as
a
result
of
falling
interest
rates.
Some
experts
suggest
reducing
liquidity
in
the
portfolio
as
holding
liquid
assets
has
become
less
appealing:
“With
the
rate-cutting
cycle
in
eurozone
underway,
a
key
priority
for
investors
is
to
manage
their
liquidity
needs.
Current
returns
on
cash,
while
attractive,
will
not
be
around
for
much
longer,” says
Dean
Turner,
chief
eurozone
and
UK
economist
at
UBS
Global
Wealth
Management,
in
a
June
6
note.
“We
favour
reducing
holdings
of
cash
and
cash-like
investments
in
favour
of
those
that
can
offer
more
durable
returns,
such
as
a
portfolio
of
quality
bonds,”
Yield
Curve
Inverted,
But
No
Recession
The
other
factor
to
consider
is
the
inverted
yield
curve
in
the
eurozone,
with
10-year
government
bonds
offering
lower
yields
than
two-year
ones.
The
inverted
yield
curve
is
often
seen
as
an
indicator
of
recession
but
is
now
sending
different
signals.
For
Andrea
Conti,
head
of
macro
research
at
Eurizon,
the
inverted
curve
“reflects
the
temporariness
of
the
current
level
of
short-term
rates
and
discounts
their
future
descent”.
Eurizon’s
global
view,
published
at
the
end
of
May,
warned
bond
investors
to
expect
volatility.
“Long-term
rates
are
at
levels
consistent
with
the
current
phase
of
the
economic
cycle.
However,
if
future
inflation
data
confirm
the
rise
seen
in
May,
bond
markets
could
experience
volatility.”
Where
Bond
Managers
Invest
Now
Bond
managers
are
already
looking
beyond
the
June
6
rate
cut,
and
positions
vary.
Some
comments
after
the
ECB
meeting
showed
a
preference
for
medium
and
short
maturities
and
peripheral
debt,
such
as
Italian
government
bonds,
but
there
are
also
portfolio
managers
who
take
a
more
global
view
on
fixed
income.
//
]]>
Mauro
Valle,
head
of
fixed
income
at
Generali
AM
has
a
preference
for
peripheral
country
debt
and
argues
that
yesterday’s
press
conference
didn’t
make
investors’
lives
any
easier.
“We
continue
to
have
a
positive
view
for
German
rates
over
the
2.5%
area
and
we
are
maintain
our
long
duration
exposure.
We
are
positive
on
the
short
to
medium
maturities
of
the
euro
yield
curve,
as
inversion
of
the
yield
curve
is
quite
significant
and
we
don’t
see
conditions
for
a
further
inversion
in
the
next
future.
“We
continue
to
be
positive
on
peripherals
countries
as
carry
trades
[investing
to
take
advantage
of
higher
rates]
and
search
for
yields
will
continue
to
be
a
driver
for
investors
preferences,
considering
that
in
the
future
the
euro
rates
could
be
lower,”
he
says.
“Lagarde
today
was
not
very
helpful
for
investors
in
fixed
income:
however,
she
confirmed
the
direction
of
travel,
which
will
see
rates
gradually
fall,”
comments
Francesco
Castelli,
head
of
fixed
income
at
Banor.
“In
this
context,
we
see
bond
duration
not
as
a
risk
but
as
an
opportunity.
For
an
investor
with
a
medium-term
horizon,
maintaining
a
duration
between
three
and
five
years
makes
it
possible
to
set
attractive
yields
today
that
are
higher
than
the
rate
of
inflation
(indicatively
3%
for
government
portfolios,
4%
for
corporate
investment
grade)”.
Duration
reflects
bonds’
sensitivity
to
interest
rate
changes;
bonds
with
longer
maturities
have
higher
duration
because
they
have
higher
interest
rate
risk.
Time
to
Look
at
Medium-Term
Bonds?
Or
High
Yield?
For
Patrick
Barbe,
head
of
European
fixed
income
at
Neuberger
Berman,
the
market
could
anticipate
at
least
three
rate
cuts
this
year
compared
to
only
around
two
today.
“This
would
be
favourable
to
medium-term
bonds
and
the
debts
of
the
lowest
rated
European
states.”
In
a
post-meeting
note
from
the
ECB,
Ann-Katrin
Petersen,
chief
investment
strategist
for
Germany,
Austria,
Switzerland
and
Eastern
Europe
at
the
BlackRock
Investment
Institute,
urges
investors
to
keep
the
big
picture
in
mind.
“Rates
will
likely
stay
structurally
higher
than
before
the
pandemic,
supporting
the
appeal
of
income.
We
are
tactically
neutral
euro
area
government
bonds
as
the
policy
path
remains
uncertain.
Relative
to
the
US
we
see
support
for
European
bonds
due
to
smaller
fiscal
deficits.”
Gabriele
Foà,
portfolio
manager
at
Algebris
Investments,
in
a
note
dated
6
June,
said:
“Rate
cuts
are
not
a
fixed
income
investment
thesis
per
se.
We
see
more
value
in
the
high-yield
component
of
global
credit,
which
depends
less
on
rates
and
more
on
growth.
The
level
of
credit
spreads
is
tight
compared
to
the
historical
average,
but
there
is
no
shortage
of
opportunities
in
select
areas.
“In
Europe,
we
see
value
in
financial
subordinates
[lower
rated
bonds]
and
in
defensive
sectors
such
as
telecom
and
utilities,
especially
on
the
junior
side.”
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