What impact do changed interest rate expectations, political and geopolitical developments have on bonds? Are they leaving a positive or negative mark today? And how do you deal with this as a bond investor and portfolio manager? Mark Van Assche, Private Banking and Wealth Office account manager, talks to Romain Dédericks, portfolio manager at KBC Asset Management.

05/02/2025

What to expect at a first 'get-to-know-you' meeting

• Inflation in both the US and Europe is currently being driven by stubborn but not accelerating core inflation (especially in the service sector). 
• This, combined with more volatile energy prices and upward base effects, will make the path of disinflation more difficult in the near term. 
• On top of this, Trump policies (via planned import tariffs and the impact of stricter migration policies on the labour market) are widely believed to push global inflation slightly higher again.

• The exceptional stimulus programmes are being scaled back, but there is no sign of savings drift. On the contrary, Trump is planning new tax cuts under his leadership and is even toying with the idea of eliminating income taxes. However, the extent to which his tariff plans can compensate for this remains to be seen. 
• China also continues to regularly support its flagging economy through new policy decisions.
• The Fed and the ECB both cut base rates by 100 basis points in recent months. The market is expecting the ECB to cut rates by an additional 100 basis points over the course of this year, while expectations sit at just 25 basis points for the US. 
• The Fed has also taken a time-out recently, whereas the ECB trimmed another 25 basis points off its key rate.

• Stubborn core inflation and continued robust economic growth have been pushing US bond yields sharply higher since September. Fears about the inflationary impact of Trumponomics (due to factors such as planned policies on migration, import tariffs and the national budget) have fuelled this increase further. 
• Eurobond yields were able to partially withstand this effect. Although it is likely that the peak has been reached.

• The results season kicked off recently with fine performances in the US financial sector. 
• It’s a mixed bag when it comes to big tech companies: numbers are generally solid, but investors are sometimes spooked by what the companies are saying about the outlook for the quarters ahead. 
• Analysts are now expecting 14% earnings growth for US companies in 2025. This seems feasible, although the contribution from the technology sector may be a lot smaller. The rest of the companies that were barely able to achieve earnings growth in 2024 are now expected to make a solid contribution. 
• For the euro area, the expected earnings growth of 7.5% appears almost certainly too high.

• The conflict in the Middle East and Ukraine could continue to cause nervousness. 
• As far as what will happen to the aid to Ukraine, Trump's policy decisions could certainly have a big impact, something we saw for ourselves last week. We are also closely following political developments in Germany and France. 
• Lastly, Chinese AI technology may throw a spanner in the works due to the fact that DeepSeek has achieved impressive results at a fraction of what it costs in the West.