November 2023 Insights | Insight Private Clients

Annualised performance data in euros at 31st October 2023

In our September investment update, we discussed how long duration government bonds remained unattractively priced. The US yield curve at the time was inverted by 70 basis points with 2-year yields at 4.9% and 10-year yields at 4.2%. Since then, long duration US government bonds have continued to fall in price. 10-year yields have risen 40 basis points to 4.6% while 2-year yields have held at 4.9%. The curve has flattened but remains inverted by 30 basis points. Unless we are headed for recession in 2024, a view many Managers do not subscribe to, long-term bonds should offer a premium to shorter-dated fixed income securities to compensate for the longer duration of the investment. The yield curve should not be inverted. Looking back over more than forty years of data, 10-year yields have at times exceeded 2-year yields by over 200 basis points. There is still plenty of room for long duration bond yields to rise and values to decline.

November 2023 Insights | Insight Private Clients

Drivers behind the sudden rise in long-term yields include the recent surge in issuance this year in the US to fund their exploding deficit; quantitative tightening by the Federal Reserve as Jerome Powell looks to reduce the Fed balance sheet by selling some of the bonds they own; investor concern about growing US deficits and debts during non-recessionary times; and more simply, the impact of the Fed’s repeated message of keeping rates higher for longer. It is most likely a mix of all of these factors that continues to weigh on government bond prices.