2024 – review of a turbulent year

Falling inflation, a change in the Fed’s strategy and a new (old) president in the USA – the past year had a great deal to offer bond investors. By Lars Conrad

2024 was another challenging year for the bond markets. There were major fluctuations which varied greatly depending on the maturity and currency area. Looking back, large parts of the bond market finished 2024 offering significantly higher yield levels than at the start of the year.

Three market phases are particularly noteworthy:

• The significant bond market correction in the first months of the year, given the continued resilience of the US economy and surprisingly strong US consumer spending.
• This was followed by a significant recovery in the wake of falling inflation data and a temporary weakening of the US labour market. This rally preceded the first US key rate cut in September. Of particular importance was the shift in the Federal Reserve’s (Fed’s) dual mandate away from price stability and towards monetary policy support for the labour market. In this context, large parts of the yield curve normalised.
• From October onwards, the ‘Trump momentum’ then led to renewed upward pressure on yields, particularly in the USA. Euro bonds were largely able to decouple from the weak final quarter on the US bond market, in view of the fundamentally increasingly divergent situation in the eurozone.

The rise in US yields has been particularly notable of late. Yields rose on the back of robust economic data and (possible) growth stimuli from the new Trump administration, as well as more defensive signals from the Fed, which at its December meeting announced only two rate cuts for 2025 (instead of the four previously announced in its September quarterly forecasts). Yields on 10-year US Treasuries rose by around 79 basis points in the fourth quarter of 2024, and by approximately 64 basis points for inflation-protected TIPS with the same maturity.

In the eurozone, the picture was very different. Concerns about economic growth (especially in the manufacturing sector in Germany), have been intensified by the prospect of potential tariffs from the new US administration. Hence, the development of inflation (sideways in the core rate with slight upticks in the headline rate in the fourth quarter) is increasingly taking a back seat. Against this backdrop the ECB signalled further scope for interest-rate cuts and revised its inflation and growth forecasts downwards for 2025 and 2026.

Focus in the eurozone also shifted to the ‘heavyweights’ France and Italy. Together with growing debt levels, the increased coupons paid on government bonds issued in recent years are driving interest expenses higher over time. According to estimates by the EU Commission, 2.3 per cent of gross domestic product (GDP) could be used for this purpose in France this year, and 4.1 per cent of GDP in Italy.

Against this backdrop, the scope for fiscal stimulus appears more than limited and, in fact, austerity measures and/or monetary policy easing could well be necessary over the medium-term. In this context, euro bonds have recently been able to largely escape the significant upward pressure on US yields. As a result, the interest-rate differential between the euro area and US dollar area has at times reached new highs for the year.

2024 was another challenging year, with rising yields across much of the global bond market – especially outside the euro area – leading to price declines in many cases. The Barclays Global Aggregate TR Index Hedged EUR bond index, which reflects the performance of global bonds with investment-grade quality, delivered a total return of around 1.7 per cent in 2024. For German Bunds, as measured by the REXP index, it was even lower at just 1.1 per cent. British government bonds and US Treasuries performed significantly worse. Rising yields led to price losses on securities in circulation, which over the course of the year exceeded interest income.

The past year is also a reminder that, despite a fundamentally defensive approach, higher returns are possible with a flexible and active investment strategy.

In the next part of our newsletter, Fund Manager Frank Lipowski explains how he has positioned his portfolio for this difficult environment – and what his expectations are for 2025.

Lars Conrad is Portfolio Director Fixed Income at Flossbach von Storch SE.