Are bond yields close to their floor?
The global bond market remains in an easing phase, driven by the renewed rate cuts from the US Federal Reserve in response to a weakening labour market and inflation deemed to be under control. While a slight decline in long-term US interest rates is still possible, the scope for further easing appears limited due to prevailing economic and political uncertainties, particularly concerning the Fed’s independence.
In Europe as well, the room for long-term rate declines is narrow. Against this backdrop, a strategy favouring medium-term bonds seems appropriate, offering a balance between yield and interest rate risk. Investment-grade corporate bonds appear more attractive than sovereign debt, especially in Switzerland where public bond yields are near zero. At the same time, caution remains warranted towards issuers with weak fiscal discipline, such as the United Kingdom and France.
In search of a tariff agreement
Asian markets have recorded one of their best performances in recent months, with a rebound of over 40% since their April lows. This rally is largely driven by the easing of trade tensions and the boom surrounding artificial intelligence, which has particularly supported markets in Taiwan and South Korea.
Conversely, the rebound of the Chinese market is more surprising, as it unfolds within a weakened macroeconomic environment. Retail sales, investment, and construction have continued to decline. Exports also remain under pressure due to ongoing trade tensions with the United States, although part of this decline is offset by the strength of non-US exports.
On the geopolitical front, while tariff hikes have turned out to be less severe than initially announced, negotiations are progressing slowly. President Xi Jinping retains several strategic levers in his dealings with Donald Trump, including control over rare earth exports and his relationships with Russia and North Korea.
True to his recurring tendency to back down from his own threats, President Trump quickly set aside his announcement of an additional 100% tariff on Chinese goods starting November 1st, in response to China’s export restrictions on rare earth elements. This episode once again illustrates his negotiation tactics ahead of the planned meeting between the two heads of state in two weeks.
At this stage, neither Washington nor Beijing appears to be in a hurry, which could lead to a further extension of the 90-day tariff truce set to expire on November 10th.
Domestically, Chinese authorities are expected to implement targeted support measures to meet their annual objectives. Economic growth remains in line with expectations, making a large-scale stimulus unlikely at this point.
On equity markets, valuations have recovered, though they remain below excessive levels. Investor sentiment has improved, albeit cautiously. After several years of neglect, the renewed interest in Asian markets is noteworthy.
In this context, we maintain a constructive medium-term view on the region and recommend a neutral exposure to China, which is benefiting from both a return of momentum and the prospect of a weaker US dollar.
This week’s figure: $15 billion
This is the daily cost of the current “shutdown” to the US economy, representing an estimated weekly impact of around 0.1% to 0.2% on the country’s GDP. So far, the government paralysis has not unsettled the markets, despite twenty days of budgetary deadlock between Democrats and Republicans.
Author
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Ed Yau is an Asian market specialist with 20 years of experience in managing equity portfolios. He previously worked as Head of Research in several Hedge Funds in Switzerland and Singapore. An HES engineer by training, he also holds a degree from the University of Geneva and an MBA from the University of Chicago. He joined the Bank in 2018 and became a member of the investment committee, in charge of managing several thematic certificates and equity funds, as well as setting up ESG investments.
