Bond Watch: are central bank rate cuts about to start?

Welcome to interactive investor’s ‘Bond Watch’ series, covering the latest market and economic news – as well as analysis – that is relevant to bond investors.                 

Our goal is to make the notoriously complicated world of bond investing simpler, by analysing the week’s most important news and distilling it into a short, useful and accessible article for DIY investors.                 

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The ECB cuts rates 

The European Central Bank (ECB), pictured above, cut interest rates for the first time in nearly five years, from 4% to 3.75%.  

However, the move was labelled a “hawkish” cut as traders scaled back bets for another rate cut in September, even though it is still the most likely outcome currently. 

The move from the ECB may make it easier for the Bank of England to follow suit later this year. 

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Ann-Katrin Petersen, an investment strategist at BlackRock, said that the jury is still out on the pace of easing from here.  

“We don’t think the ECB will cut far and fast. Investors should keep the big picture in mind: rates in the euro area will likely stay structurally higher than before the pandemic,” she said. 

Even though the ECB has moved before the Bank of England and US Federal Reserve, it may not keep cutting interest rates if it is going against what other major central banks are doing.  

Salman Ahmed, a strategist at Fidelity International, said: “The rate trajectory of the ECB will depend on the evolution of data from here on and the Federal Reserve, which we think will be unable to cut this year given the stickiness in US inflation.”

The next Bank of England rate decision is on Thursday 20 June, but given that it is just two weeks before the general election, it is unlikely that there were will be a change in interest rates. There is no meeting in July.  

Indian bonds become more important 

The rise of India’s economy is being felt more and more in stock and bond markets. Not only has its Nifty 50 stock market index been one of the best performers globally over the past five years, nearly doubling in value, but its bonds are now being included in JPMorgan’s GBI-EM Global Diversified Index. 

This is a major update to its emerging market bond index, which will mean that funds that track the index will now have to buy Indian bonds. 

Lee Collins, head of index fixed income at Legal & General Investment Management, said: “We would expect that, for our index fixed income desk, India’s inclusion in the JPMorgan index will be the biggest individual index-related event in 2024.” 

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LGIM runs L&G Emerging Markets Government Bond (USD) Index Fund, which tracks the JPMorgan Index, as well as the L&G India INR Government Bond UCITS ETF.  

Prime Minister Narendra Modi won a third term in the Indian election this week. The news was welcomed by markets as he is seen as a pro-business leader.