Different trends are emerging this week with regard to the expected key interest rate cuts in the USA and the eurozone. This has a direct impact on bond trading on the Frankfurt Stock Exchange. There is also strong demand for corporate bonds.
5 April 2024. FRANKFURT (Börse Frankfurt). The hawkish statements of some US central bankers have put a severe damper on hopes of rapid and significant interest rate cuts this week. In particular, the statement by Neel Kashkari, President of the Federal Reserve Bank of Minneapolis, raised eyebrows. He fundamentally questions falling interest rates this year if inflation continues to move sideways. Arthur Brunner from ICF Bank sees no reason for the US monetary authorities to act too hastily. "The labor market is calming down and wages are rising, which is currently a solid foundation for the US," explains the trader. In view of the rising oil price, we should also expect slightly higher inflation.
US labor market report in focus today
Unlike the equity markets, the bond markets have barely reacted to the latest statements on possible interest rate hikes. The yield on ten-year US bonds rose only slightly over the week from 4.20% to 4.31%, with the trend in the second half of the week even pointing downwards again after reaching a high of 4.42%. There could be a little more movement this afternoon when the US labor market report for March is published. According to Helaba, however, the assessment that the Fed can still take its time with the interest rate turnaround is "unlikely to change".
The view that the ECB will cut key interest rates before the Americans is thus becoming increasingly entrenched on the markets. "While the Fed is standing on the brakes and cooling expectations, ECB chief Christine Lagarde has leaned far out of the window," notes Klaus Stopp from Baader Bank. The bond expert also assumes that the first interest rate hike in the eurozone will take place in June. This is also indicated by the ECB minutes of the last meeting, which have just been published. In addition, according to Stopp, the ECB risks a certain loss of reputation if it waits any longer. Martin Hallmann from Commerzbank adds that the market is currently pricing in almost four easing measures of 25 basis points each by the end of the year.
Short German Bunds and US dollar bonds in demand
In line with these forecasts, both Brunner and Stopp are reporting strong demand for short-dated German government bonds (DE0001141810 or DE0001141802). "Such bonds are likely to benefit the most from any interest rate cuts," explains the ICF Bank bond specialist. With the yield curve currently still inverted, investors would now be quick to secure the comparatively high interest rates.
At Baader Bank, there is also strong demand for US dollar bonds, such as a government bond maturing in March 2026 with a yield of 4.6 percent (US91282CKH33). In addition to the slightly higher interest rates compared to the eurozone, this could also be due to positive currency expectations for the greenback in view of the interest rate trend.
High yields arouse interest in corporate bonds
In the corporate bond segment, Tim Oechsner from Steubing AG reports good sentiment and lively buying interest. "Bonds from German companies with a denomination of 1,000 are particularly in demand for yield diversification". The trader reports good turnover, for example, for two Volkswagen bonds maturing in 2030 and 2031 (XS2374594823 and XS2694874533), which offer yields of 3.3 and 3.7 percent respectively. Baader Bank also has a bond from the car manufacturer on its shopping list, albeit with a term ending in fall 2026 and a yield of 3.1 percent (XS1893631769).
ICF Bank's clients have set their sights on a newly issued bond from Mutares subsidiary GoCollective (NO0013185835). The coupon of currently 12.35%, which is linked to the 3-month Euribor with a premium (850 basis points), combined with a denomination of 1,000 units, is generating brisk demand. The situation is similar for a bond from Multitude (NO0012702549) that matures at the end of 2025 and has a similar coupon. The bond, which was issued at the end of 2022, currently offers a yield potential of 10.0%. "The bond has performed well in recent weeks and is still in high demand," explains Brunner.
Price drop for real estate bond maturing shortly
Gregor Daniel from Walter Ludwig Wertpapierhandelsbank, meanwhile, points to unusually strong price movements in a bond issued by FCR Immobilien (<DE000A2TSB16>) after the company had to postpone the presentation of its preliminary figures for 2023. "The bond matures at the end of April and is quite weak with prices at just over 90 percent." Other bonds from the issuer (for example DE000A352AX7) are also trading at around 90 percent with a term until 2028.
On the other hand, Grenke Finance's bond maturing in fall 2025, which has seen a steady upward trend in recent months and is currently yielding 3.7 percent (XS2078696866), is "constantly being bought".
By Thomas Koch, 5 April 2024 © Deutsche Börse AG
Thomas Koch is a CEFA investment analyst, investment specialist for structured products and a certified certificate consultant. He has been a freelance journalist covering events on the capital markets since the beginning of 2006.
Feedback and questions to redaktion@deutsche-boerse.com
Koch