3 tools to take advantage of opportunities on the bond market


24 May 2024 - 17:00

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The positive prospects from a strategic perspective for the entire international government bond sector are growing.

3 tools to take advantage of opportunities on the bond market

21 DAYS 5 HRS 15 MIN 13 SEC”. This is the continuously updated countdown that can be observed on CME Group. A passage of time which, second after second, increasingly limits the wait to "The next FOMC meeting is in:". Monitoring this hourglass may seem unknown to some investors, but the usefulness of the tool referred to is fundamental.

We are talking about the CME FedWatch Tool whose summary is easy to understand: “Stay up-to-date with the latest probabilities of FOMC rate moves”. Now, having revealed the theme, we can consider it to be certainly topical. The outcome of the Fed’s last meeting at the beginning of the month is no longer newsworthy as it postponed its intervention to a future date, leaving the cost of money unchanged (between 5.25% and 5.50%).

Certainly, through the dissemination of the usual minutes, it will be possible to learn further elements in support of the previous choice, but, at the same time, we can already hypothesize that the general picture will not undergo particular updates: US economy still expanding, a market of well-tuned work, unemployment at minimum levels, all as a corollary to the always enigmatic inflation which, although reduced, is experiencing an all-too-cautious slowdown when compared to the expectations of some (many) members belonging to the board of the star-studded central bank and stripes.

Regardless of the moods and related states of mind with the inevitable declarations that will follow one another, here today, we want to provide a sort of compass in order to be able to identify the next and potential choices in the delicate field of the bond asset class.

CME Group – FedWatch Tool

Returning to the aforementioned FedWatch Tool, the first appointment on the agenda which highlights a change in sentiment due to a possible monetary intervention, is placed on the occasion of the meeting to be held in September: in fact, the probability that an initial cut may occur. Despite the small overall percentage, the values of the latter are objectively higher when compared to the current quantum of June (3.6%) and July (23.6%).

At the moment, however, based on recent news, the immediate post-August cut-off could be somewhat premature and, in fact, proof of this supposition comes from the observation of the data attributable to the November meeting where 74.4% are the (current) probabilities for action by the Fed. If this were not the case, another and final confirmation is that of December which, probably, attests to an almost certainty with an emblematic 88.5 percent.

Bloomberg Global-Aggregate Total Return Index Value Unhedged Usd - ICE BofA MOVE Index

Having archived the alleged "certainties" about a possible cut in interest rates, we also believe it is appropriate to identify the risk associated with the entire and important bond component. Operationally, from a positioning perspective (long), an underlying is therefore suggested which is similar to one of the most usual benchmarks used by the asset management industry, i.e. the Bloomberg Global-Aggregate Total Return Index Value Unhedged Usd: currently in the 458 area, 5 points is the result of a prolonged bearish phase that began in January 2021 which, obviously, reflects the consequences of the monetary dynamics that characterized the subsequent years.

Now, having contextualized the scenario (ref. Fed intervention) and identified the plausible instrument, as mentioned, it becomes mandatory to measure the risk or in some way the market mood on this entire asset class. For this purpose, important information can be obtained from the careful monitoring of the ICE BofA MOVE Index (abbreviated as MOVE) which, making a quick parallel, can be compared to the better-known Vix as a barometer of uncertainty but, in this case, of the bond component only.

As is evident, by placing the aforementioned benchmark Bloomberg Global-Aggregate Total Return Index Value Unhedged Usd alongside the latter, one can easily identify real divergent phases between both underlying which, over the years, have repeatedly emphasized some excesses on the occasion of particular events.

Today, without any prophetic intent, all of this evidence reported so far gives us hope from a strategic perspective on the entire international government bond sector. As indicated, we reiterate, that this is a strategic view and, therefore, a split positioning through a plurality of inputs is hoped for.

Upon closer inspection, we have placed the individual pieces useful to us on the board: CME FedWatch Tool, Bloomberg Global-Aggregate Total Return Index Value Unhedged USD, and ICE BofA MOVE Index.

Now, the matter is up to the Fed. Let the game begin.

The information and considerations in this article should not be used as the sole or primary basis for making investment decisions. The reader retains full freedom in his own investment choices and full responsibility in making them, since he alone knows his risk propensity and his time horizon. The information contained in the article is provided for informational purposes only and its disclosure does not constitute and should not be considered an offer or solicitation to the public for savings.|

Original article published on Money.it Italy 2024-05-22 15:50:00. Original title: 3 strumenti per approfittare delle occasioni sul mercato obbligazionario


# Bonds

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