Global bonds rallied on Friday as renewed concern over the banking sector spurred demand for safe assets and fueled bets central banks won’t be able to keep raising rates for long.
(Bloomberg) — Global bonds rallied on Friday as renewed concern over the banking sector spurred demand for safe assets and fueled bets central banks won’t be able to keep raising rates for long.
Yields on US Treasuries and European sovereign bonds slid, led by short-end debt that is more sensitive to policy changes. Investors turned to havens as bank shares slumped after Bloomberg News reported Credit Suisse Group AG and UBS Group AG are among lenders under scrutiny in a US Justice Department probe into whether financial professionals helped Russian oligarchs evade sanctions. UBS shares plunged as much as 8.2%.
The moves on Friday extended a rally in bonds ignited by the fallout from three US lenders failing and the takeover of Credit Suisse, which has fueled bets policymakers around the world will become more cautious on raising interest rates. That view was underscored this week by the Federal Reserve, which tempered its language around how much additional tightening it might do, even as it delivered another quarter-point hike.
“The speed at which 2023 has rotated through expectations of hard versus soft landing, cycle extension, and now financial instability is an incredible example of the cycle volatility which is likely to persist while inflation remains elevated,” said Martin Harvey, a Wellington Management portfolio manager who runs the Hartford World Bond Fund and is bullish on bonds relative to other asset classes.
The yield on German two-year bonds slumped 31 basis points, while its US equivalent fell 27 basis points. US swap rates linked to policy meeting dates show traders briefly fully priced in a quarter-point rate cut by June, even as Fed Chair Jerome Powell insisted Wednesday that cuts are not his “base case.”
UK government bonds also got a boost from the Bank of England’s decision to hike its policy rate by a quarter point while saying inflation in the second quarter may be lower than previously expected. Analysts at banks including UBS, Nomura Holdings Inc. and ING Groep NV saw that as a signal the tightening cycle is nearing an end, while traders are no longer fully pricing in another 25 basis-point increase.
–With assistance from James Hirai.
(Adds swaps pricing in second to last paragraph.)
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