Bond yields: a sign of changing expectations

Debt markets appear to have started the year with returns not seen since before the pandemic. According to Alberto Matellán, chief economist at MAPFRE Inversión, all this is the result of a change in expectations. “There is a readjustment happening due to the possible arrival of a tougher monetary policy and higher-than-expected inflation,” he explained on Radio Intereconomía. Everything would indicate that what we are experiencing is a process of normalization, so “as long as it remains at that level there is no cause for concern.”

In this scenario, it is up to the central banks to take action at the upcoming meetings. From the Federal Reserve, after a more aggressive message than anticipated by investors earlier this year, the expert is expecting “a preparatory message”: “Hopefully they will give us some news on when they will start raising rates and also reducing their balance sheets, which is even more important.” Beyond the Fed's discourse, he believes the key will be the information they provide in order to “set expectations for this year.”

Nor did the stock markets anticipate Christine Lagarde’s harsher tone in her most recent appearance. However, the dynamics of inflation, constrained by external factors and geopolitical issues, make it likely that, if the peak was reached in December, “we will see a more cautious message from the European Central Bank.”

To lay the groundwork for this year, the economist also emphasized corporate earnings in the coming days. “Although retail sales may suffer, good fourth-quarter data are expected,” he said. In addition, the companies’ accounts may serve as an indicator “of how they are doing with respect to rising energy prices and transport problems.”

In this situation, it seems understandable that, in the first instance, investors may lower the weight of assets such as equities in their portfolios. However, Alberto Matellán explained that if the objectives are more long-term, it would not be necessary to make too many moves: “If that weight reduction is being done due to market timing, that’s a problem; but if it's being done with the long term in mind, I think it's fine.”