Morningstar has released its Review of European Fixed Income Markets for Q1 2024. It reports that European fixed income markets recorded mixed performance in Q1 2024.
Although inflation figures continue declining, stronger than expected macroeconomic data and hawkish comments from central bank officials significantly reduced market expectations for near-term interest rate cuts and led to higher government bond yields.
Key takeaways from the report include:
- European government bond yields rose in Q1, following the move in US Treasury yields. As a result, government bond indices recorded losses, which however only partially offset the very strong gains of Q4 2023.
- The performance trend for UK fixed income indices was similar to the European indices. The main difference was that the government bonds fell more and high yield bonds increased more compared to Europe.
- Core government bond yields, including German and French government bonds saw their yields increasing.
- European investment grade indices outperformed government bonds and posted small positive returns.
- UK government bond indices underperformed, with longer maturities posting the largest losses. The 10-year Gilt yield increased to 3.94% from 3.54% over the course of Q1 2024.
- Inflation-linked bond indices delivered the largest losses in Q1 driven by their longer duration.
- European high yield indices delivered the best returns and continued outperforming into the new year after the strong 2023. Supporting factors included investor demand for yield, positive corporate earnings and strong momentum of equity markets.
- UK investment grade corporate bond achieved a marginally positive return.
- Resources, healthcare, and duration-sensitive sectors such as telecoms and utilities underperformed and declined. UK high yield corporate bond indices continued benefiting from moderating UK inflation, resilient corporate earnings and compelling levels of yields.
Evangelia Gkeka, Senior Manager Research Analyst, Morningstar and author of the report commented: “Market expectations for interest-rate cuts have been pushed back and government bond yields increased. High yield and financials outperformed in Q1 2024. Longer duration and more defensive sectors such as government bonds underperformed. In terms of flows, we continue to see net inflows into government bond and investment grade corporate bond categories. High yield started seeing moderate net inflows and emerging markets continue having net outflows.”
You can find the full report here!
