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Investors have piled into US and European government bonds after the US 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 0.08 percentage points to 4.71 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.
Some economists say that increase in borrowing costs relieves pressure on the Fed to increase benchmark rates further to rein in the US economy and bring down inflation.
Government bond markets also rallied across Europe, with the biggest moves in the UK ahead of the Bank of England’s interest rates decision on Thursday.
Two-year gilt yields, which reflect interest rates expectations, fell 0.09 percentage points to 4.7 per cent, the lowest level since June. Benchmark 10-year gilts fell 0.1 percentage points to 4.4 per cent.
Markets have priced in a near certainty that the BoE will keep rates on hold at 5.25 per cent, but will be watching closely for any change in language that could indicate when they think rates will start coming down.
Ten-year German bond yields — the benchmark for the eurozone — fell 0.05 percentage points to 2.7 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 stagnating economy and higher borrowing costs.
In the US, Powell warned that the Fed “was not confident yet” that monetary policy was sufficiently restrictive to bring inflation back to the its 2 per cent target.
But Deutsche Bank research strategist Jim Reid said the Fed chief’s remarks had a “dovish tilt”, highlighting Powell’s comment that “monetary policy is [already] restrictive”.
Government bond yields were also pulled lower after the US Treasury department announced on Wednesday it would slow the pace at which it issues longer-dated debt. Much weaker than expected US manufacturing data then helped fuel the Treasury rally, outweighing buoyant labour market data.
“Initially the rally was around less long-end US Treasury issuance than expected, and it really was US Treasury focused. But then a much weaker ISM [Institute for Supply Management] report than expected suggested that US growth momentum is waning,” said Mike Riddell, a bond fund manager at Allianz Global Investors.
