JPMorgan Shifts Focus to Australian Bonds as European Rally Cools

The remarkable run in European government bonds is nearing its end, prompting JPMorgan Asset Management to shift its focus to Australia, reports Bloomberg.

The firm's portfolio manager Kim Crawford believes that further gains in European debt are limited, given that interest rate cut expectations from the European Central Bank (ECB) are already largely priced into the market. In contrast, the Reserve Bank of Australia's (RBA) dovish pivot, coupled with its relative inactivity so far in this rate-cutting cycle, positions Australian bonds for a more compelling rally compared to other developed markets.

"A lot of the Europe story has played out," Crawford told Bloomberg. "Australian government bonds are the ones that probably are most attractive to us right now. That's a more interesting near-term divergence story for us."

European government bonds have consistently outperformed their US counterparts for over a year, driven by expectations of more aggressive rate cuts from the ECB compared to the Federal Reserve. This has widened the spread between 10-year German and US notes to 215 basis points, approaching five-year highs.

Australian bonds, on the other hand, have traded within a narrow range for much of the past 18 months as the RBA maintained rates amid ongoing inflationary concerns. However, the RBA's recent statement expressing confidence in inflation moving sustainably towards its target has shifted market sentiment.

Swaps markets now anticipate three quarter-point cuts from the RBA in 2025, compared to two expected from the Fed. The US central bank, meeting later this week, is widely expected to announce a 25-basis-point rate cut but also signal fewer cuts next year than previously anticipated.

While the ECB is projected to deliver as many as five quarter-point cuts next year, Crawford believes that positioning is already stretched. She describes the long trade on short-dated European notes as one of the most crowded in bond markets.

For the ECB to deliver more easing than currently priced by the market, there would need to be a significant hit to investment or consumption, Crawford argues. However, the expectation that Germany will loosen its fiscal policy next year makes this scenario less likely.

"Near-term, I think Europe is a little bit harder to see significant outperformance," said Crawford.