Vanguard Group and Goldman Sachs believe that German government bonds will outperform US Treasuries in the future. The yield spread between US 10-year Treasury bonds and German government bonds has widened from 1.5 percentage points in mid-September to 1.9 percentage points. The Federal Reserve is no longer expected to cut interest rates in the short term, while the European Central Bank may further reduce rates. Both Vanguard Group and Goldman Sachs are optimistic about the performance of German government bonds, expecting the European Central Bank to cut rates by approximately 135 basis points by 2025
According to the financial news app Zhitong Finance, institutions such as Vanguard Group and Goldman Sachs believe that German government bonds are outperforming US Treasuries, which is a future theme. The indicator reflecting this trend, the difference between the yields of US 10-year Treasury bonds and German 10-year government bonds, has risen from around 1.5 percentage points, the low point of this year touched in mid-September, to about 1.9 percentage points. In September, the Federal Reserve unexpectedly cut US interest rates by 50 basis points. Since then, US interest rates have risen by about 60 basis points to around 4.20%, while German rates have only increased by about 20 basis points.
The motivation behind the views of these institutions is that with the astonishing resilience shown by the US labor market and consumers, the Federal Reserve will no longer cut interest rates further in the short term, while the European Central Bank is expected to further cut rates as economic growth slows down.
Roger Hallam, Global Rates Manager at Vanguard Group, which manages nearly $10 trillion in assets, said, "Our investment strategy favors poor US rate performance and excellent European rate performance." "We are studying the relative growth differences between the US and Europe and believe that the outlook for the US is relatively favorable, while Europe's macro outlook seems somewhat weak."
Traders expect that by September 2025, the European Central Bank will cut rates by about 135 basis points, and the Federal Reserve will cut rates by 125 basis points.
Hallam, head of Vanguard Group's actively managed bond fund, said, "We still believe this is a trade," but more than half of the company's approximately $2.4 trillion fixed income assets are passively managed index funds.
Goldman Sachs bond strategists maintained their previous recommendation last week that German government bonds will outperform 10-year US Treasuries. George Cole's team wrote on October 18 that while the view on the US presidential election results on November 5 "may be a factor leading to the decline in US rates so far this month, in our view, the continued strengthening of fundamentals is the main driver of this trend."
They wrote, "Upcoming macroeconomic and policy data continue to support the divergence between the US and other rate markets (especially Europe)."
Since the Fed cut rates last month, US September employment data has been stronger than expected, and consumer inflation is more sticky. This week, Dallas Fed President Lorie Logan and Kansas City Fed President Jeff Schmidt both indicated a preference for slowing down the pace of rate cuts in the future.
The International Monetary Fund raised its expectations for US economic growth on Tuesday while lowering its expectations for the eurozone. The organization expects the US economy to grow by 2.2% by 2025, while the eurozone economy will grow by 1.2%.
Due to the faster-than-expected decline in inflation in the Eurogroup of 20 countries, the European Central Bank has accelerated its rate cuts. Investors are betting on a 25 basis point rate cut at each of the next five meetings, with the deposit rate expected to reach 2% by mid-2025. The market also implies a 45% chance of a 50 basis point rate cut in December.
ECB President Lagarde said on Tuesday during the IMF and World Bank annual meetings that the inflation trend in the eurozone is "relatively reassuring," and the direction of borrowing costs is clearly downward, although the speed is yet to be determined Former CEO of Pacific Investment Management Company (PIMCO), Mohamed El-Erian, stated that he is more bullish on European and UK bonds than US treasuries. El-Erian mentioned last week, "The market expects the European Central Bank and the Federal Reserve to cut interest rates by the same magnitude." "I don't think that will happen."