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 fell to the lowest levels this year and German two-year yields dropped over 30 basis points. 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. Deutsche Bank AG’s shares slumped as much as 15%, the most March 2020.
The renewed turmoil led traders to reduce bets on additional monetary tightening by the world’s major central banks. US swap rates linked to policy meeting dates almost completely abandoned wagers on a May rate increase and 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.” For the European Central Bank and the Bank of England, traders no longer price in an additional quarter-point rate 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.
Deutsche Bank became the latest focus of the banking turmoil in Europe as it said Friday it will redeem a tier 2 subordinated bond early. Such moves are usually intended to give investors confidence in the strength of the balance sheet, though the share price reaction suggests the message isn’t getting through.
The yield on German two-year bonds slumped 31 basis points, while its US equivalent fell 27 basis points. The spread between 5- and 30-year Treasury yields jumped to a one-year high at 36.2 basis points.
The moves on Friday extended a rally in bonds ignited by the fallout from 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.
–With assistance from James Hirai.
(Updates with context on Deutsche Bank and Fed bets throughout.)
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