Global bond managers face challenges predicting future rate cuts, with UK rate cut expected in November

From Morningstar: 2024-08-02 14:01:00

Global bond managers are facing challenges predicting future rate cuts as the US has yet to cut rates, while the eurozone has already acted. Market expectations suggest the next UK rate cut may occur in November after the Autumn Budget. Central banks communicate their intentions, but bond managers must also consider market expectations which can change daily.

Interest rates in the US, Europe, and UK are expected to fall further, impacting UK government bond yields. Investors can achieve total returns through yield and capital appreciation. Cash deposits offer capital protection but not capital gains. Bond managers believe investors may switch from cash to bonds as central banks are set to cut rates.

Despite growing pressure for more rate cuts, some argue August’s cut may have been unnecessary. The ECB signaled a rate cut in June but has since been cautious. Mehta believes the latest cut could be a one-time event, with limited scope for further cuts this year. UK inflation is expected to rise, potentially affecting future rate decisions.

One fixed income manager urges the Bank of England to cut rates more aggressively to support the economy. Critics argue that the rigid monetary policy since 2021 has slowed economic growth. The new Labour government’s political stability in the UK could attract overseas investors to UK bonds. Rate cuts could also increase demand for fixed-income instruments.

The Federal Reserve’s next moves are crucial for global bond managers as US and UK interest rates are comparable. Market expectations suggest US rates may decline further than UK rates. Managing duration risk is essential for bond investors as longer-term debt is more sensitive to rate changes. Political stability, credit ratings, economic growth, and inflation all play crucial roles in bond investments.



Read more at Morningstar: What the UK Rate Cut Means for Bond Markets