Economy

Government bonds: what to expect in 2025

You can never rest easy with government bonds, both Italian and foreign, for those who hold them directly. Until a few months ago, we thought of a progressive decline in the interest rate, and this would automatically produce an increase in prices. But recently, between mid-December 2024 and mid-January 2025, something changed. European and American government bonds dropped significantly in price, contrary to what one would have expected, while rates rose slightly. So what to do now? And what to expect for the rest of the year?

Meanwhile, there are technical considerations that explain the high level of volatility reached by the bond markets. Vittorio Fumagalli, senior portfolio manager at Decalia Sim, says that the market phase which goes from around mid-December to around mid-January is characterized by a high level of speculative volatility. Furthermore, since 2024 was a good year for bond performance, many asset managers may have taken advantage of it for profit-taking.

The basic problem remains: what to do now? The situation, according to Decalia, is different between the USA and Europe. In the United States, the Governor of the Fed, worried about the recovery of inflation, has already reduced the rate cuts to just two in 2025. Fumagalli writes that “the central bank will certainly adopt a more gradual approach in reducing interest rates, still maintaining the relatively high cost of money (today 4.25%-4.50%, compared to a neutral rate (between 3.75% and 3.50%) between restrictive and expansionary monetary policy, to counteract inflation which could still surprise on the upside due to the good performance of the economy”. The American yield curve has therefore started to rise again, pushing the returns of longer-term securities towards the highs already reached in 2022.

In Europe the situation is different: the economic trend is decidedly weaker and inflation is more under control. Furthermore, in order to support the Eurozone economies, the ECB should continue to lower rates. As Decalia explains, the restrictive maneuvers of European governments to reduce their respective deficits could also limit the supply of new government bond issues, exerting further upward pressure on the prices of existing ones. However, Europe usually follows the USA and therefore could suffer new inflationary pressures even if they come from overseas.

Decalia draws two pieces of advice from this situation: the first is to focus on long-term US government bonds. The yields on the ten-year and thirty-year bonds gravitate respectively around a very interesting 4.65% and 4.90%. “The objective of an investor – we read – should be to obtain a high coupon yield in the long term rather than a price increase correlated to a reduction in rates”. What Decalia does not say and presupposes is that it is one thing to operate as an asset manager, who knows all the hedging possibilities in the face of changes in the Euro-Dollar exchange rate, another as an individual saver who could be burned by a devaluation of the US currency, considered likely in the coming months by many.

Easier if a saver from the Euro area operates within the same market: there is no risk of devaluations. The experts’ advice is to also focus on long-term securities in the Euro area: the 10-year German government bond yields 2.58% annually at maturity today compared to 2.03% at the beginning of December, the Italian BTP has gone from 3.20% approximately today’s 3.70%; Also worth mentioning in this case is the new thirty-year BTP 4.30% 01.10.2054 which from its price highs of 108.50 is now around 99.80. In conclusion, we are in a good time window for a long-term investment, from which there will be high coupons while here there could also be a capital appreciation if rates, as the ECB says, fall.