Published:
Against the backdrop of geopolitical tensions this year and the numerous important elections, the biggest surprise from a bond market perspective is the lack of major volatility. Inflation has generally developed well and was in line with expectations. However, other macroeconomic data fluctuated a little, leading to movements in interest rates as the market had a different view on the speed and extent of further rate cuts. Overall, US and Norwegian interest rates have risen slightly year-on-year, while Swedish and European interest rates have fallen slightly. The soft landing scenario continued to dominate market reporting and the relatively favorable economic developments were more important than the increasing geopolitical uncertainty, resulting in fairly strong equity and credit markets. Credit spreads have largely normalized and volatility has been quite low.
Few signs of recession
As was the case at the start of 2024, it is not difficult to find areas of concern when looking ahead to 2025. Geopolitical risks will always remain and could even increase with a new and untested administration in the US. The world will have to adjust to possible new trade and domestic policies in the US, and in Europe, German elections are due in early 2025. On the positive side, inflation is likely to continue to moderate, providing scope for further interest rate cuts in both the US and Europe. Economic growth will be moderate in the US and quite weak in Europe, but there are few signs of recession. In this scenario, interest rates could remain range-bound or even fall slightly. Credit spreads could remain quite tight, leading to decent bond performance. However, the scope for a further significant narrowing of credit spreads is quite limited.
Negative correlation between bonds and equities is back
We believe that the negative correlation between bonds and equities has returned, and we saw clear signs of this in the summer of this year. In this environment, economic growth and not inflation is the main risk for equities and bonds, which therefore once again represent a good diversification of equity risk.
The Nordic bond markets have performed quite well in 2024, both in the investment grade and high yield segments. In addition to the general factors already mentioned, the Nordic markets have also benefited from a fairly short duration and a high proportion of floating rate bonds. Floating rate notes (FRNs) have performed well in a market with relatively stable interest rates and inverted yield curves. If the pace of rate cuts by central banks remains moderate (i.e. no recession), FRNs could continue to perform well in 2025. We also believe that real estate bonds will continue to perform well in this environment.
The outlook: Geopolitics and the US labour market remain in focus
At this stage, it is difficult to predict which events will be the most important in 2025, but we can at least identify a few that we will be watching closely. The new Trump administration's trade/tariff policy has the potential to roil markets, depending on how it is shaped. Based on Trump's statements, markets should be prepared for limited tariffs on all non-Chinese imports and relatively high tariffs on Chinese imports, but uncertainty remains high. A major escalation of the war in Ukraine or the Middle East could have a significant impact on markets, as could an unexpected peace deal in Ukraine. As far as economic development is concerned, we still consider the US labor market to be the key market for the overall development of interest rates. A further slowdown would lead to faster and stronger rate cuts and vice versa. As far as domestic developments are concerned, the Norwegian wage settlements next spring will be particularly important for Norges Bank's interest rate path.
More defensive positioning of portfolios
Credit spreads are generally quite tight, especially in the US. It is therefore difficult to see spreads narrowing significantly from here. The situation is different for Norwegian and Swedish credit spreads, which are closer to their averages of the last 12-13 years. We have positioned our portfolios somewhat more defensively than a year ago, but still see the likelihood of decent outperformance from credit over a 12-month horizon.
We expect the cycle of central bank rate cuts to continue in most countries (and that Norway will also start cutting rates in the first quarter of 2025). We see some potential for lower rates in the US and Norway, while for Europe and Sweden we believe the scope for rate cuts is more limited given the divergence observed in recent months.
Last updated:
Share: