ING – Rates Outlook, 2024

The authors of the article are optimistic about the bond market's outlook for 2024. They expect a shift in the rate cycle, leading to upward curves at lower levels. However, they express concerns about liquidity risks, the fiscal deficit in the US, and geopolitical events. The focus of the year will be on anticipating rate cuts and their eventual implementation. According to the authors, bond markets become excited when central banks prepare for rate cuts. Both the Federal Reserve and the European Central Bank are attempting to maintain the narrative of rate hikes, but the markets have already priced in approximately 100 basis points of cuts from both banks in 2024. As the rate cut cycle begins, market rates fall, and front-end rates, such as 2-year yields, clearly decline. Longer-term rates also tend to fall, with maximum returns typically seen in the 30-year segment. The authors caution about potential liquidity concerns. While liquidity has been abundant since the pandemic, the central banks are gradually tightening their quantitative easing policies. This could create issues in the functioning of the financial system. Additionally, liquidity in US Treasuries is already a worry, and the influence of bank and market repo in driving overall liquidity has diminished. Looking towards 2025, the authors anticipate that official rates will reach around 3% for the US and 2% to 2.5% for the eurozone. They believe that the baseline market discount for official rates will be influenced by various factors, including the US supply story and the outcome of the US presidential elections. Overall, the authors expect a return to normality in the bond market, but acknowledge the uncertainties and challenges that lie ahead in 2024. They express discomfort with the optimistic outlook and emphasize the lure of government bonds as rates decline in the coming year. However, the authors admit that the situation becomes more uncertain beyond 2024.