Monetary easing: bonds rise and rates fall

This article was written by Daniel Varela, Chief Investment Officer. It appeared in Capital Insight on 18 September 2024.

Daniel Varela explains how central banks, by adopting monetary easing policies are supporting the bond market rally. The rate cuts initiated by the European Central Bank (ECB) and the US Federal Reserve (Fed) are contributing to a steady fall in bond yields, which is beneficial for investors. According to Daniel Varela, this process by no means over: ‘The potential for yields to fall, and therefore for bond prices to rise, does not yet seem to have been fully exhausted’.

This trend is taking place against a backdrop of disinflation, after years of rising rates and persistent inflation. This fall in the rate of inflation is now enabling central banks to ease their monetary policies to support growth. ‘The disinflation seen in recent months is now allowing the major monetary decision-makers to reverse their policies, with the aim of boosting weak economic growth’, he adds, highlighting the economic challenges ahead and the role of central banks during this transition.