The bond market in Q2 2024 was a rollercoaster! Early concerns about stubbornly high inflation and the Federal Reserve delaying interest rate cuts caused significant volatility. Investors heavily sold bonds, pushing prices down.

However, by mid-quarter, things started to look up. Inflation data showed signs of improvement, with June CPI recording its first monthly decline since the pandemic. At the same time, the labour market is softening, with multiple downward revisions to the nonfarm payroll numbers and rising unemployment rate. Consequently, the market is now pricing in 2-3 rate cuts this
year, starting with a 25bps cut in September. That’s a stark contrast to an expectation of 1 cut, just a month ago.

One potential complication is the upcoming US presidential election. 16 Nobel prize-winning economists, including prominent economists Joseph Stiglitz and Robert Shiller, have warned that the US economy will suffer if Republican presidential candidate Donald Trump wins the presidential election in November. The jointly signed letter said that Trump's economic plans would reignite inflation, due to his fiscally irresponsible budgets as well as his pledge to impose stiffer tariffs on imports. They believe that a 2nd Trump term will have a negative impact on the US' economic standing in the world, and a destabilizing effect on the US domestic economy.

Nonetheless, the recent positive data suggests the Fed’s past efforts are working, and rate cuts are on the horizon. It is a good time for investors to term out their fixed income investments and extend duration to lock in the higher yield, while staying with high quality investment-grade companies.

30 Jun 2024