4 questions for Daniel Rauch

After the years of the Great Inflation, which began in the 1960s and was replaced by the Great Moderation in the mid-1980s, we have entered a capital market regime since 2020 that we call the Great Transformation. This new investment environment is characterised by more growth, higher inflation, higher nominal and real yields and increased volatility. To a large extent, this means a reversal of the Great Moderation.

From an investor’s perspective, the focus is once again shifting to investments in bonds. The times of even negative bond yields are behind us and, in our opinion, will not return any time soon. The challenge now is therefore to combine the respective asset classes, such as government bonds, covered bonds and corporate bonds, in a sensible way. We expect increased volatility, i.e. tactical weightings are essential. In the first half of 2024, we saw that the riskier segments in particular benefited from narrowing risk premiums. We are currently focussing on the more conservative segment, i.e. covered bonds and investment-grade corporate bonds in particular.

Covered bonds are experiencing a renaissance: not only are traditional investors returning who had left the segment during the low-rate environment, but new investors are also coming in. These were attracted in particular by the attractive risk premiums in a relative value perspective. The demand side is therefore very strong and met with a high supply, even by historical standards. While the new issue premiums in January to mid-February could still be described as appealing, since then the increasing strength of demand in particular has meant that issuers have even been able to place their new bonds below their secondary curves in some cases. Fortunately, the market found a new, more balanced issue level at the beginning of the summer.

In our opinion, market participants are eagerly awaiting the start of the primary market after the summer break. On the one hand, many issuers are already well advanced in their funding plans, while on the other hand we are facing a high event risk with the US presidential election, among other things. It therefore remains to be seen to what extent prefunding for 2025 will be brought forward more than usual or whether issuers will tend to take a cautious approach, as the strength of deposits and the volume issued to date appear to provide sufficient time should the stability of risk premiums decrease again.

We currently expect two more interest rate cuts on both sides of the Atlantic by the end of 2024. However, we are not alone here, as the market is currently pricing in pretty much the same expectations.