The big bond debate: Bull or bear market in 2024?

Set against a backdrop of sustained global geopolitical and economic disruption, the world’s bond markets are moving through a period of great uncertainty.

In the short term, there are questions as to whether yields have peaked as central banks pull the levers of interest rates to temper inflation without depressing economic growth.

In the longer term, the rise of the Global South through new trade routes and multilateral economic agreements is shifting economic power away from the developed economies.

The recently announced India-Middle East-Corridor reflects the scale of ambition and optimism across the developing markets – many of which are experiencing rapid economic growth thanks to their newly liberalised capital markets, national diversification strategies and large inflows of capital.

The new corridor, revealed at the G20 summit in India this year, would create two new trade routes linking India to the fast-growing GCC and then on to Europe.

Once it makes progress, its physical infrastructure, data networks, ports and gas pipelines will deepen economic and political ties between East and West, with the high-growth GCC countries acting as a de facto gateway for the economic interests of 1.4 billion people in the Global South.

Capital raising for such development will be critical and we may well see nations tapping bond markets to facilitate this corridor. Moreover, the Middle East’s economic power base is to be further bolstered by Saudi Arabia and the UAE joining the Brics group in January.

The challenge for investors is to make sense of these rapidly changing global dynamics during a period of historic debt, sluggish growth and political uncertainties in the developed economies.

For the bond markets, these confusing signs are giving rise to disparate views on performance, creating a lack of consensus between bulls and bears.

Bond bulls argue that today’s yield of around 5 per cent on the 10-year bond incorporates an extended pause by the US Federal Reserve at current policy rates, with a sizeable real (net-of-inflation) yield of close to 2.5 per cent.

This would bring yields on 10-year bonds close to pre-2008 highs.

However, bond bears argue that for yields to return to a normalised curve with long maturity yields above short maturity yields, the 10-year yield must rise above an extended Fed policy rate of 5.5 per cent, with a still-robust US economy.