Monthly Bond Commentary - January 2025

Financial markets whipsawed during January in anticipation of Donald Trump's return to the White House; the 10-year US Treasury yield rose 22bp to a peak of 4.79% before ending the month at 4.54%. Fears that Trump's agenda will reignite inflation trimmed expectations of the number of interest rate cuts the Federal Reserve will deliver this year. Protectionist policies are seen to increase consumer prices and recent tariff threats could well crystalise this; that is if they are indeed enacted. Corporate bonds followed a similar trajectory to Treasury's and ended the month up 0.55% a seasonally strong return compared to the 0.31% average return of the last five years. Naisbitt King portfolios continue their outperformance of their longstanding, respective benchmarks and sovereign markets.

All major central banks, excluding the Bank of Japan, have lowered their policy rates. Though outlooks are highly divergent between Europe and the United States. Both the Bank of England and European Central Bank, who cut rates by 25bp this month, are facing weaker economies than the Federal Reserve with the former cautioning stagflation in a blow to the Labour government. Due to these risks, we have continued a focus on US corporate risk, while maintaining exposure to European financials who we believe are better positioned than corporate counterparts.

Additionally, corporate earnings season began in January and initial indications show positive headline figures. As of the end of January aggregate S&P 500 revenues are up 5.3% compared to an estimate of 4.7% while EPS growth reached 10% compared to a 7.3% target. Despite this price reactions have been more negative than in previous years due to the exceptionalism demanded by high equity valuations. Concurrently, the spread on corporate debt has tightened towards its lowest levels since 2000 as balance sheet quality improves further. We are currently risk-off due to this rich pricing and are therefore invested in higher quality bonds as the premium paid by lower quality issuers does not reflect the risk assumed by investors.

We expect bond market growth in 2025 to be solid. Federal Reserve rate cuts, like those of other central banks, are likely to be smaller than in 2024, but interest rates should still lower at the end of the year. In Europe, we expect more subdued growth this year. However, Trump’s tariff increases, depending on their size and comprehensiveness, are likely to be inflationary and detrimental to growth. The market currently does not expect a full, nor long lasting implementation however, which justifies the subdued reaction. The negative impact of tariffs and immigration restrictions may be offset, at least to some degree, by other policies expected to benefit the US economy. For instance, we anticipate that supportive fiscal policy, which is currently driving investment and contributing to a productivity boom, will continue to promote strong non-inflationary growth. Market deregulation, including in the energy sector, could also prove disinflationary. We believe that household, and corporate balance sheets should remain robust.