Fixed Income Viewpoints: Life at the Top

The Viewpoints series gives investors Lazard’s perspectives on the latest macroeconomic and fixed income news and trends. In this edition, Lazard Asset Management's fixed income team contemplate what surging yields on U.S. government securities and sharply rising crude oil prices will mean for central banks weighing further interest rate increases. 

For fixed income investors, the end of a central bank rate-hiking cycle can be a time of relief and anticipation: relief that the challenges of rising rates and falling bond prices are winding down and anticipation that rate cuts will follow — creating the potential for price appreciation in bonds.

Yet, as the United States and Europe appear near the end of their rate-hike cycles and many emerging markets are at peak rates and contemplating cuts, the global bond markets have shown more uncertainty and volatility than relief and anticipation. Since early August, the U.S. 10-year Treasury yield has risen more than 20 basis points (bps) to around 4.33%, weak economic reports have plagued much of Europe, and emerging markets have fallen under the influence of China’s sharp growth slowdown.

At their meeting in mid-September, Lazard’s fixed income professionals pondered this “messy” inflection point. Taken at face value, recent economic data may be pointing to a soft landing for the U.S. economy, which would help sustain global growth. Looking below the surface, however, that outcome is far from certain. Crude oil prices, for one thing, have risen more than 25% since early July on OPEC+ supply cuts, threatening to reignite inflation and drive the Federal Reserve to resume rate hikes. On top of that, a torrent of new bond issuance has put upward pressure on bond yields over the past month.

Click here to read the September issue of Fixed Income Viewpoints.