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Bonds down for 5 years: is it really the right time to buy? The forecasts of strategist Alessandro Fugnoli (Kairos)

In the latest episode of his podcast “Al 4° Piano”, Kairos Partners strategist Alessandro Fugnoli takes stock of bonds, which have been in free fall for years, but with some opportunities to be seized with caution

Bonds down for 5 years: is it really the right time to buy? The forecasts of strategist Alessandro Fugnoli (Kairos)

In the latest episode of the podcast “On the 4th floor", Alessandro Fugnoli, strategist at Kairos Partners, addresses a crucial question for investors: “What's happening to bonds??”. The bond market, which has been suffering from a steady descent, has sparked debate among those who see theopportunity of a recovery and those who fear that the storm has not yet passed. Fugnoli explores the reasons for this continued decline and the implications for investors.

The Long Decline of Bonds

Until three months ago, investors were finally expecting a turnaround in 2025, after four years of suffering. But no, the reality is different: the decline in bonds continues, and long-term bonds, especially dollar bonds, they don't seem to want to stop. Even if the coupons generous measures of the last two years have cushioned the blow, the final result is negative, especially for the long-term bonds (ages 10 and up). In short, bond portfolios are suffering, but all is not lost.

The Causes of This Bear Market: Inflation Is The Queen of the Party

Le causes of this bear market are clear according to Fugnoli. “Theinflation, first of all” which continues to weigh like a millstone. Then there is the growing supply of bonds by governments e companies, which is faced with a demand that, despite having liquidity, is not willing to buy at any price. "Here then is the restoration of the positive real returns, when in the last decade and in the years of Covid the market was resigned to buying at yields lower than inflation. Here also reappears the term premium, or that additional yield that in long bonds tries to compensate for the volatility of rates over time”.

The Fed, an institution in an identity crisis

One of the most difficult phases to interpret was the one in which the Federal Reserve he started to cut rates. Despite a 50 basis point cut in September, followed by two further 25-point cuts in the following months, the Long bond yields have risen instead of decreasing, as one would have expected. Fugnoli compares this situation to that of the late seventies, “when the market was wary of the Fed cutting because it knew that inflation was smoldering and would soon rise again.”

Fugnoli also notes a lack of harmony between the market and the Fed, which has changed direction several times. The rate cut in September was seen by many as “overblown and politically motivated,” but while the Fed was concerned about the labor market, these fears proved unfounded, as the U.S. economy has grown steadily: “America is running at full capacity and employment is very high.” The strategist points out that the Fed is currently signaling to the market that cuts will be more moderate than initially expected, thus giving a pause for reflection, which could reduce anxiety.

To further complicate the picture, however, there are the Treasury issues “which will soon return to financing itself on the long end of the curve after a phase in which emissions were concentrated on the short end”. Furthermore, there is no lack of uncertainty about the policies of the new American administration, which could, although not certain, “push inflation upwards”, creating new turbulence on the bond markets.

US and European bonds as buying opportunities?

At this point, however, Fugnoli does not hesitate to answer the question that everyone is asking: the Are US bonds an opportunity? The answer is yes, but with caution. “The demand also involves European bonds, which have been dragged into the recent decline by the American declines,” Fugnoli specifies. Although inflation remains high, the inflation expectations they moved little, and the China will continue to export deflation. The combination of high rates and slower growth could lead to lower inflation, creating the conditions for lower rates in the long run.

The real challenge is to understand whether it is worth it investing in long-term bonds, when short-term ones offer very attractive returns with significantly lower risk. “You can certainly dedicate a portion of your bond portfolio to long-term securities, but more as insurance against a recession than as an opportunity for capital gains,” Fugnoli explains.

Stocks and Bonds: The Growth Dilemma

The last chapter of the story concerns the bags, which are already starting to feel the effects of therising bond yields. Historically, when rates go up, the stock multiples are compressed. However, as Fugnoli points out, "the stock markets have healthy economies and growing profits on their side". This mix of high rates and growing profits will lead to a 2025 with stock markets that are certainly "less effervescent than the past two years". However, in a scenario in which the tech is dominating the market, "the European stock exchanges, which have less technology, could do better than the American one for some time".

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