Schroders Global Fixed Income Investment Director of Hong Kong, Wu Meiyan, pointed out that the highly anticipated Paris Summer Olympics has come to a perfect close, and each country's joy or sorrow will depend on the number of medals they have won. During the Olympics, the capital markets have been anything but dull - first, the Bank of England followed the European Central Bank in joining the rate-cutting team, and recently, the disappointing US employment market data has significantly increased the likelihood of a rate cut by the Federal Reserve (Fed) in September. With the exception of the Bank of Japan, which is departing from 30 years of deflation and raising rates, almost all major central banks globally have entered a race to cut rates. What impact will this have on global bond market investments? Does central bank rate cuts indicate an economic slowdown or recession? Like the Olympics that occur every four years, global investors seem to have finally entered a cycle of central bank rate cuts this summer. In theory, rate cuts will benefit the bond market, but blindly investing in bonds of any type may not be the wisest decision. It is recommended to analyze the economic situation behind the rate cuts before taking further action. Firstly, recent global manufacturing leading indicators have weakened, with significant slowdowns in the US, Eurozone, and Chinese ISM Manufacturing PMI. As a high cyclical industry indicator, such widespread slowdown signals have raised concerns about an economic recession. On the other hand, the US labor market remains weak, with non-farm payroll growth below market expectations, an increase in initial jobless claims, and a decrease in consumer confidence. Although Schroders Global still expects the labor market to remain weak but healthy, given its importance for economic growth expectations and Fed decisions, more signs of economic slowdown after August have increased the likelihood of an economic recession, and Schroders Global believes that the market's current expectation of a quick rate cut by the US is relatively reasonable. When it comes to rate cuts (especially rapid ones), many investors immediately think of the possibility of an economic recession, so they increase the duration of bond investments in the hope of enjoying more substantial bond price appreciation during the interest rate decline process. However, looking back at the performance of the global bond market over the past 18 months, the global bond market reacted as early as the fourth quarter of last year to the expected rate cuts in the US by 2024, with bond prices surging significantly; on the contrary, in the first half of 2024, due to the delayed rate cuts in the US, long-term bonds did not perform as expected. An economic "soft landing" remains the current basic assumption Today, the current backdrop of rate cuts can be described as between an economic "soft landing" and an economic recession. Therefore, hastily increasing long-term bond investments is not a wise move. Schroders Global believes that although the risks of an economic recession have increased, a soft landing is still the basic assumption, and Schroders Global still prefers corporate bonds to government bonds. At the beginning of August, there were signs of mispricing in some assets, such as a significant increase in volatility indices and a sudden drop in bond yields. Schroders Global believes that due to the limited impact of tighter financial and credit conditions on growth prospects at this stage, Schroders Global maintains the basic assumption of an economic soft landing. In addition, the improvement in the deflation situation, and the Fed's ability to offset the negative impact of tighter financial conditions by accelerating rate cuts when necessary. How should the bond market be priced? Recently, the US Treasury market has quickly repriced itself. In the week from July 29 to August 2, the yield on US 2-year Treasuries dropped by more than 50 basis points. Although Schroders Global does not believe that the Fed will immediately cut rates now, this wave of repricing in bond rates seems to have overcorrected, and some premiums reflecting the possibility of an economic recession will be returned. As of August 6, the market is predicting that in the next four Fed rate meetings, there will be more than five instances of rate cuts by 25 basis points each, which is more than the belief of Fed Chairman Powell, who suggested not cutting rates by 50 basis points in a single meeting within a week. Schroders Global's proprietary bond valuation system shows that the current market pricing represents an economic recession probability range of 20-40%, higher than Schroders Global's own 20% recession probability judgment. For this reason, Schroders Global believes that the current valuation of US Treasury bonds is not attractive strategically. Dynamic rebalancing and awaiting opportunities Therefore, considering the degree of repricing, Schroders Global is not eager to increase the duration of bond investments in the global bond portfolio, but instead maintains a certain flexibility. Unless the market becomes more pessimistic and believes that the probability of a recession is continuing to rise, long-term bonds will have further appreciation potential. Looking back on past economic recessions, they have almost never occurred independently or out of thin air, and usually require a large external or internal shock to disrupt the balance, such as an oil crisis or a banking crisis. However, it does not seem that we are currently in such an environment. On the other hand, the US presidential election is approaching, with both parties' presidential candidates holding views supporting economic growth, which to some extent reduces the likelihood of a future mid-term economic recession in the US. In summary, if Schroders Global believes that bond pricing becomes more reasonable, it will continue to closely monitor the financial markets and seize investment opportunities in credit spreads re-pricing. For example, currently, 1-5 year global investment-grade corporate bonds appear more attractive, but attention will also be paid to volatility risks.