May 17, 2024

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Bond markets rally as investors dial down interest rate expectations

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Investors have piled into US and European government bonds after the Federal Reserve bolstered the impression that central banks are at the end of their rate rise cycle.

Yields on 10-year US Treasuries, which move inversely to prices, fell 0.19 per cent on Wednesday, the largest daily decline since the collapse of Silicon Valley Bank in March. On Thursday, yields fell an additional 0.12 percentage points to 4.67 per cent.

The movements came after Fed chair Jay Powell made what investors saw as dovish remarks after the central bank’s decision on Wednesday to hold its benchmark funds rate at between 5.25 per cent and 5.5 per cent.

Powell emphasised that the Fed was “proceeding carefully” with future rate rises, comments some investors said reflected broader shifts in the long term Treasury market.

Ten-year yields have risen sharply over the past six months, partly because of the Fed rate rises, but also as the US government has unveiled plans to issue much more debt.

Line chart of % showing 10-year Treasury yields plunge

Some economists say that higher borrowing costs relieve pressure on the Fed to increase interest rates further to rein in the US economy and bring down inflation.

Government bond markets also rallied across Europe, with gilts advancing as the Bank of England announced it would hold rates at 5.25 per cent and governor Andrew Bailey warning that officials “should not keep monetary policy restrictive for excessively long”.

Two-year gilt yields, which reflect interest rates expectations, fell 0.09 percentage points to 4.70 per cent, the lowest level since June. Benchmark 10-year gilt yields fell 0.15 percentage points to 4.35 per cent.

Ten-year German bond yields — the benchmark for the eurozone — fell 0.05 percentage points to 2.70 per cent. The shift came as data showed the German jobless rate rose to 5.8 per cent in October — the highest since June 2021 — a sign of a…



2023-11-02 10:19:43

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