German perspective on bonds “the possibility of an improvement in US interest rates will increase”

The bond market developed positively throughout the week due to the fall in the US inflation rate. However, traders are questioning whether this trend will continue in the US. This is probably also one of the reasons why long-term corporate bonds are being sought.

2024/7/12 Frankfurt (stock exchange). Expectations for U.S. interest rate cuts in the near future have boosted bond prices this week. The 10-year US Treasury yield is currently 4.21%, which is at a low level since the end of March. At the beginning of this month, the yield was still just under 4.50%.

The downward trend in yields this week is due to the fact that the US inflation rate fell more sharply than expected. “The trend of disinflation appears to have been maintained, and since the figures were a positive surprise, expectations for interest rate cuts have increased,” explains Helaba's analyst. As for Fed futures, the probability that the Fed will cut interest rates for the first time on 9/18 is 100%. An additional 25 basis point rate cut is expected once or twice by the end of the year.

“The first rate cut by the US Federal Reserve (Fed) is only a matter of time,” says Tim Oxner of Steubing AG. In his opinion, this signal was somewhat weakened by solid data on the labor market. “If the labor market is strong, wages will rise, and so will the inflation rate. However, LBBW analysts believe that “the US labor market is still on the other side of the shiny facade, and the situation seems to be falling apart more and more.” Therefore, it is also seen that there is a “growing possibility” that the US monetary authorities will cut back on major interest rates at the September monetary policy meeting.

Yields have also declined in the European bond market. 10-year government bonds fell 10 basis points to 2.46% of their lowest price. Annual bonds have fallen from a weekly high of 2.91% to the current 2.82 percent. The futures market anticipates additional interest rate cuts by the ECB until September with a probability of 83%. Nothing is going to happen next week.

Bader Bank's Klaus Stop is still not convinced that German bond yields will continue to decline in the future. In particular, considering the current political situation, I believe that the federal republic's relatively low level of refinancing remains questionable. As for 10-year German government bonds, which are not so strongly influenced by ECB policies, we imagine an increase of 2.80 to 2.90%. “Still, it's probably a relatively low level,” traders say.

In trading at the Frankfurt Stock Exchange, experts explained that “we are already slightly prepared for the summer slump,” while watching transaction volumes. German corporate bonds with long maturities (2030 to 2034) of Lufthansa German Airlines (XS2815984732), Heidelberg Materials (XS2842061421), Bayer (XS2630111719), and Fraport (XS2832873355) are being bought in particular. The yield for both is around 4%.

Jung, DMS & Cie bonds. Pool's (DE000A3514Q0) 2028 maturity bonds have received orders from Steubing AG customers, and the yield is approximately 6%. Also, Oxner reports that demand for bonds issued by Deutsche Bahn Finance (XS2689049059) is also high. There are also reports from ICF Bank traders that the Lufthansa bond transactions described above continue to be strong. Also, there is demand for 4-year bonds (price is about 98%, maturity 2028) with 2-digit coupons for Multitude Capital Oyj (NO0013259747).