Bonds, different scenarios in Europe and the US, but Treasuries dictate the law

The scenario for bond markets has become much more complicated than investors expected. Indeed, the global economy is fragmenting again: in the United States, any hint of a slowdown is promptly neutralised by the still-robust consumption and labour market statistics; in Europe and China, on the other hand, the signs of a slowdown are evident. The consequence is that bonds (debt securities) in the United States and Europe are being pushed against each other.

European bonds will have to cope with interest rates still falling to support the economy: the market estimates a reduction to 2.4% by the first half of 2025 from the current 3.4%, which means that there will be buying flows on bonds already in circulation, both because they offer higher returns than those being issued, and because if the economy slows down, investors move to assets considered more defensive. In addition, European governments have to come back from excessive deficits and therefore, operate restrictive manoeuvres that reduce the supply of debt and cause upward pressure on prices.

Conversely, US bonds are less likely to appreciate as a result of the rate cut: the Federal Reserve could make very gradual easing of the cost of money, which is now at 5%, as there is no need to support growth. On the contrary, the greatest risk is that inflation will peep in again. In addition, both candidates in the US elections on 5 November have budgets that inflate the deficit and public debt and thus weigh on bond prices, if only as a matter of abundant supply. Among other things, the likelihood of a victory for Donald Trump, who has risen in the polls and promises tax and spending cuts without too many strings attached, is back in the limelight. Estimates, in fact, draw an exponential line in debt and deficit, which currently stand at $1.8 trillion and $27 trillion, respectively, on a GDP of $29 trillion.

It has to be seen, however, how far the gap between European and US issues can widen. The US bond market conditions all the others and, so far, the major central banks have always gone in the same direction on rates, although not always in unison. Not least because it would be difficult for Europe to keep growth, cost of money and inflation in balance for long in a slowdown phase, if at the same time the US economy continued to run and a wide yield differential were to be created.

In recent stock market sessions, US bond yields have set the pace in the international market, and as they have risen on the euphoria over growth, which is driving away the need for rate cuts, they have also taken European yields with them, in defiance of expectations of another percentage point cut in rates in the Old Continent. Italian government bond yields also rose, with the yield on the ten-year BTp rising from 3.36% to 3.55% in the first two days of last week.