Our 2023 core sovereign bonds outlook

After a difficult 2022, we expect bonds to be back in favour in 2023, with long-dated US Treasuries’ safe-haven status serving to protect multi-asset portfolios in the event of recession. The US Federal Reserve’s (Fed) continued hawkishness going into next year due to the stickiness of US inflation and the robust employment market is likely to maintain some upward pressure on the 10-year US Treasury yield from current levels (3.42% on 7 December) in the first months of 2023.

Nevertheless, both lower US Treasuries Notes and Bonds issuances in 2023 and recession risks lead us to foresee the 10-year US Treasury yield ending 2023 at around 3.5%, with occasional rallies towards 3% during the year. Due to their safe-haven status, we expect US Treasuries to benefit from any market turmoil or worries around a recession in the US, even if the Fed does not cut its policy rate.

Although we position tactically on long-dated US Treasuries, we have decided to move from neutral to overweight on US Treasuries going into next year in order to benefit from their safe-haven status.

However, we remain neutral on core euro government bonds, as we expect more elevated inflation in Europe and large net issuance by the German government to finance substantial fiscal stimulus, pushing the 10-year Bund yield from 1.78% (on 7 December) towards 2.1% by end-2023. This means a narrowing of the yield differential with its US counterpart. And although we consider the Bund’s safe-haven status to be questionable in this environment, we foresee a range of between 1.5% and 2.5% next year.