I never was one to conform. I’m certain that my parents, former teachers, friends and now wife would all testify to that fact. This latest rebellion against the norm is to be writing this monthly macro and market summary in the middle of the month. I am steadfastly refusing to be constrained by the shackles of the Gregorian calendar. I know what you’re thinking – and you’re right. What a rebel.

There are a few practical reasons why I’ve started 2025 in such a fashion – not least, I am sure that you dear reader are bombarded with monthly review pieces at the beginning of each calendar month – in my rebellion I hope to thin the herd and possibly grab a little extra attention. Unrelated to the timing of this piece, and indeed all future musings of this nature, I hope to maintain your attention by seeking to offer a non-consensus view on events. One where I communicate in a more jocular and conversational style – as I am doing now (that probably should have read “as I am trying to do now” but let’s not be defeatist just yet). Market updates in the form of “X went up by 8bps, while Y went down by 2bps” are as dry and dull to write as they are to read. Believe me – I’ve written A LOT of them.

Lots has happened over the last 12 months, but our tl;dr (as the internet would say) would be – macro economic data has been volatile, inconsistent, conflicting and, at times, downright confusing. What’s made things worse has been the overwhelming tendency for the market to take short-term gyrations within the long-term trend and extrapolate. To compound that problem, our monetary overlords within central banks have done much the same. Their policy deliberations lack a coherent framework, and the individuals involved seem to agree on very little from one month to the next. Some are looking backwards; others are looking forwards and everyone seems to have a different model for understanding inflation dynamics. About a year ago, I coined the phrase “narrative table tennis” to describe this back and forth between the inflationistas and the deflationistas and unfortunately for us all, that game is still afoot and now the policymakers are joining in.

If I hadn’t already lost all my hair, and all the colour from my facial hair, then the last month would probably have been another month to push me towards those inevitable end games. Being a bond investor has been pretty hair-raising over the last few years and the back end of 2024 and opening weeks of 2025 were very much a continuation of that theme.

The data has been blamed for much of the weakness we saw in bond markets over that period. In fact, for much of the time data was surprising negatively relative to investor expectations in the US. Outside of the US there is still a much larger body of evidence falling on the side of “end game” than there is “take off”. So, we would argue that the data hasn’t been the dominant issue.

The Federal Reserve definitely have a hand in this. Their December decision was to cut rates by 25bps as expected and then spend every last breath of their communication explaining to the market why fewer cuts were likely to be needed. The ole “hawkish cut”. If it sounds baffling to you that’s because it is. What it did was lead to a material repricing of market expectations for future rate cuts (ultimately leading the market to discount only a single 25bp cut for the rest of the cycle). Yet what it didn’t do was flatten the yield curve as you might expect. Normally a more hawkish central bank leads to yields on shorter-dated bonds rising more than those at the long end – a curve flattening. We didn’t get that, we got the opposite, so again we’re left seeking better explanations.

Finally, we come to fiscal policy and the impact on the supply of government bonds. The US government is running a budget deficit of 7% of GDP, with unemployment very close to the cycle lows. That is highly unusual outside of wartime and is NOT indicative of prudence or responsibility. To varying degrees, the same situation is playing out elsewhere across the developed world. When you hear someone describe the US economy as strong you might want to ask them why it is necessary for the government to keep injecting money into it if it is indeed so robust. In even more wonderful news for bond investors, newly inaugurated President Donald Trump seems intent on adding to the burden via tax cuts. Sure, there is a chance that government efficiency crusader Elon Musk and Chinese goods producers saddled with increased tariffs will manage to fill the financial gap, but most market participants we speak to seem dubious.

So, we have a scenario of strong growth, sticky inflation, a hawkish Fed and fiscal expansion from an already very expansionary starting point. That looks like a pretty unhealthy mix for bonds. Yet over the period we saw the yield curve mostly steepen and breakeven inflation rates* widen – suggesting that hawkishness was not to blame. As discussed, the data was mixed at best and, outside of the US, most certainly biased towards weakness. We saw swaps underperform Treasuries – suggesting the market wasn’t worried about supply or the fiscal credibility of the US Treasury. Thus, we are left with the rather disappointing conclusion that possibly all of these factors have played a role – or indeed none of them have. As always with markets, it’s easy to conjure rationalisations after the event, but it’s impossible to know why they move the way that they do. In this case maybe it was just a simple case of more motivated sellers than motivated buyers.

For us in the Marlborough bond team, we appreciate the risks and concerns of others and we acknowledge that they may well have played a role in the rather messy rise in yields we’ve seen recently. However, we assess that the balance of risks we see ahead makes bonds, and core government bonds in particular, look a very attractive investment. Thus, we are happy to lean into this weakness – especially outside of the US, where we find more convincing evidence of economic weakness and more conservative and sustainable fiscal policies.

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*The breakeven inflation rate is a market-based measure of expected inflation. It is the difference between the yield of a bond paying fixed interest and an inflation-linked bond with the same maturity date.

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This article is provided for general information purposes only and should not be construed as personal financial advice to invest in any fund or product. These are the investment manager’s views at the time of writing and should not be construed as investment advice. The opinions expressed are correct at time of writing and may be subject to change. Capital is at risk. The value and income from investments can go down as well as up and are not guaranteed. An investor may get back significantly less than they invest. Past performance is not a reliable indicator of current or future performance and should not be the sole factor considered when selecting funds.