The Zhitong Finance App learned that BOC Prudential Asset Management published an article stating that signs of economic growth cooling and declining inflationary pressure have provided a background for central banks, especially Europe and the US, to gradually withdraw from austerity monetary policies. This will create a favorable environment for the bond markets in the regions concerned. Meanwhile, with the Bank of Japan's policies being further normalized, Japanese bond yields may be more likely to face upward pressure. Even though historically, policy shifts have often been beneficial to bonds, the process has not been easy. The bank believes that the market will continue to fluctuate, and investors should carefully examine economic data developments and ongoing geopolitical tension.

Recent economic data shows that the US economy remains stable despite some signs of slowing down. Supported by strong consumption, the US GDP grew at an annual quarterly rate of 3% and 2.8% in the second and third quarters, respectively. Also, despite the weak performance of the local manufacturing industry, the American Institute for Supply Management (ISM) and Purchasing Managers' Index (PMI) data all showed a good trend in the local service sector. Meanwhile, although the unemployment rate rose slightly to 4.2% in November, the number of non-farm payrolls and average hourly wage increases were higher than expected, reflecting the persistence of the labor market.

On the other hand, the reduction in local inflationary pressure also provided a background for the Federal Reserve to gradually withdraw from the tight monetary policy; after cutting interest rates by 50 basis points in September 2024, the Federal Reserve cut interest rates by 25 basis points again in November. However, earlier market expectations that the Federal Reserve would continue to cut interest rates in the future have declined somewhat, mainly because Trump will once again become President of the United States (Trump 2.0). Trump 2.0, along with the Republican Party's control of both houses of the Senate and the House of Representatives, has increased uncertainty about the future of US policy: although new tax cuts and possible deregulation policies may be counterbalanced in the case of a balanced administration, the stricter immigration policies and additional tariffs proposed by Trump during the election campaign may slow growth. At the same time, if a new tariff policy is implemented, inflation may rise, and the Fed may delay returning to a neutral policy position, but the overall impact on neutral policy interest rates is still unclear.

At the press conference after the November Federal Open Market Committee (FOMC) meeting, Federal Reserve Chairman Powell emphasized that the current federal funds rate is still far higher than the neutral interest rate. Furthermore, some economic models, such as the Holston-Laubach-Williams and Laubach-Williams models, under the assumption that the inflation rate is 2%, also estimate the actual neutral interest rate to be around 3%, respectively. Meanwhile, the bitmap released by the Federal Reserve in September shows that Fed officials estimate that the median long-term policy interest rate will reach 2.875%. Based on these data, the view that the Federal Reserve will further cut interest rates in the future if no major accidents occur has been strengthened. In fact, in late November, the CME FedWatch tool showed that market participants believed that the Fed had more than 40% chance of keeping interest rates unchanged in December. Expectations for the Fed to cut interest rates by 25 basis points had already exceeded 90%, which meant that interest rate cuts had almost returned to market consensus.

Since the Federal Reserve first cut interest rates in September, US Treasury yields have rebounded from a low level. This phenomenon clearly differs from previous trends after interest rate cuts. Considering that the Federal Reserve is expected to further implement an easing policy in the future, the bank estimates that there is limited room for a further increase in short- and medium-term treasury bond yields. However, in the face of the US budget deficit that continues to expand, the US Treasury Department announced that it will increase the scale of treasury bond auctions. Since mid-2023, US Treasury bonds have been issued in excess of $300 billion each quarter. As a result, future long-term bond yields are likely to show a volatile trend.

On the credit market side, the bank continues to be cautious, as its current valuation seems to underestimate the risk of potential economic downturn and geopolitical uncertainty. Careful credit screening and flexible management of lifetime will be the key to strictly controlling risk in bond portfolios.