Bond market now expects to see the Fed cut rates

The bond market now believes that the US Federal Reserve has stopped raising fixed income rates and will cut rates next, according to AXA Investment Managers’ CIO fixed income, Chris Iggo.

Looking at recent statements from the Fed, Iggo said that its latest statements have confirmed that the chances of interest rates going up again in the United States are close to zero. He commented: “For all intents and purposes, for now at least, the interest rate cycle is over.” Iggo stated that this is positive for fixed income investors, as interest rate risk is reduced and bond investors will be less concerned about holding duration. “It is also positive for credit given that credit spreads widened and credit assets underperformed last year when the Fed was raising rates every three months. Assets that yield more than the official level of interest rates are in play to perform well in the short-term,” Iggo added.

In addition, Iggo said that investors remain in a low interest rate environment, as the European Central Bank has said it will not raise rates until next year, while the Bank of England is unlikely to raise rates in the UK unless there is a settled situation regarding Brexit. While this is a positive signal for investors, the pace of growth has slowed to the point where central banks are struggling to make their investment targets. “I would expect credit markets to continue to post decent performance in the short-term as long as the global economic environment does not deteriorate any more,” Iggo said. He added that the outperformance of credit indices relative to government bonds already seen in 2019 could continue, making this a good year for bond investors.