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Bonds are Back in Vogue

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Websim is the retail division of Intermonte, the primary intermediary of the Italian stock exchange for institutional investors. Leverage Shares often features in its speculative analysis based on macros/fundamentals. However, the information is published in Italian. To provide better information for our non-Italian investors, we bring to you a quick translation of the analysis they present to Italian retail investors. To ensure rapid delivery, text in the charts will not be translated. The views expressed here are of Websim. Leverage Shares in no way endorses these views. If you are unsure about the suitability of an investment, please seek financial advice. View the original at

As bonds emerge from a brutal three year selloff, where macroeconomics and interest rates dominated the outlook, investors expect better times in the U.S. fixed income market in 2024. Treasuries have rallied substantially in the last quarter of 2023 but are still likely to deliver good returns this year, despite yields pulling back from their peaks, as they still remain relatively high.

The impetus behind the gains stems from expectations that the Federal Reserve has likely finished its rate hiking campaign and is poised to start cutting borrowing costs in 2024. This sentiment has gained further traction when policymakers unexpectedly pencilled in 75 basis points of easing in their December economic projections amid signs that inflation continued to moderate.

The anticipated decline in interest rates is expected to drive Treasury yields lower and boost bond prices higher. Such scenario is foreseen by considerable number of investors, which are holding their biggest overweight position in bonds since 2009. Nevertheless, there are lingering concerns that the path to lower yields may be bumpy, as yields have dropped more than 100 basis point since last October, and has run ahead of the central bank rhetoric, leaving the market susceptible to abrupt short-term reversals.

While inflation in the U.S. is declining, it is still well above the Federal Reserve target, and we expect interest rates to remain elevated into the second half of the year. Given the current macro-economic backdrop, we are of the view that the Fed will remain on hold until inflation is close to 2% before it begins to ease in the face of slowing economic growth. Despite the recent rally in Treasuries, yields remain very compelling at current levels, with the U.S. 20-year Treasury now yielding 4.27%.

Meanwhile, the market appears to have priced in around 150 basis points in cuts in 2024, twice the figure policymakers have outlined. Opinions also diverge in regard to the likelihood of hard vs. a soft landing, as well as when the central bank will start cutting rates and not just by how much. Nonetheless, the Fed will start easing monetary policy as inflation declines back to target and the economy experience slower growth.

A graph of stock market

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Source: TradingView

Overall, 2023 was a year of transition for the global economy. As inflation started moderating, attention turned to slowing economic growth and prospects for interest rate cuts in 2024. This resulted in a rollercoaster ride with the 20-year U.S. Treasury yields reaching a high of 5.51% at the end of October 2023 before retreating to 4.09% at the end of December 2023 and driving bond prices up.

Despite the strong run in the bond prices over the past two months, we are of the view that the rally has not run its course yet and we remain optimistic for 2024. While in the short-term the 20-year Treasury yields could rise to 4.50%, which we see as merely unwinding oversold momentum conditions, a subsequent decline to 3.75% – 3.80% over the medium-term is on the cards. Therefore, it is not too late to join the bonds rally, as today’s environment is favourable, offering attractive yield and capital appreciation potential.

Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.

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Sandeep Rao

Research

Sandeep joined Leverage Shares in September 2020. He leads research on existing and new product lines, asset classes, and strategies, with special emphasis on analysis of recent events and developments.

Sandeep has longstanding experience with financial markets. Starting with a Chicago-based hedge fund as a financial engineer, his career has spanned a variety of domains and organizations over a course of 8 years – from Barclays Capital’s Prime Services Division to (most recently) Nasdaq’s Index Research Team.

Sandeep holds an M.S. in Finance as well as an MBA from Illinois Institute of Technology Chicago.

Violeta Todorova

Senior Research

Violeta joined Leverage Shares in September 2022. She is responsible for conducting technical analysis, macro and equity research, providing valuable insights to help shape investment strategies for clients.

Prior to joining LS, Violeta worked at several high-profile investment firms in Australia, such as Tollhurst and Morgans Financial where she spent the past 12 years of her career.

Violeta is a certified market technician from the Australian Technical Analysts Association and holds a Post Graduate Diploma of Applied Finance and Investment from Kaplan Professional (FINSIA), Australia, where she was a lecturer for a number of years.

Julian Manoilov

Marketing Lead

Julian joined Leverage Shares in 2018 as part of the company’s primary expansion in Eastern Europe. He is responsible for web content and raising brand awareness.

Julian has been academically involved with economics, psychology, sociology, European politics & linguistics. He has experience in business development and marketing through business ventures of his own.

For Julian, Leverage Shares is an innovator in the field of finance & fintech, and he always looks forward with excitement to share the next big news with investors in the UK & Europe.

Oktay Kavrak

Head of Communications and Strategy

Oktay joined Leverage Shares in late 2019. He is responsible for driving business growth by maintaining key relationships and developing sales activity across English-speaking markets.

He joined Leverage Shares from UniCredit, where he was a corporate relationship manager for multinationals. His previous experience is in corporate finance and fund administration at firms like IBM Bulgaria and DeGiro / FundShare.

Oktay holds a BA in Finance & Accounting and a post-graduate certificate in Entrepreneurship from Babson College. He is also a CFA charterholder.

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