(Bloomberg) — Bond traders are growing ever more confident that central banks are nearing the end of their tightening cycle.
(Bloomberg) — Bond traders are growing ever more confident that central banks are nearing the end of their tightening cycle.
The bravado was on full display Thursday, with yields collapsing across the euro-area and the UK even as policy makers warned investors the fight against inflation is far from over. Traders looked past the cautious messaging from the Bank of England and European Central Bank, focusing instead on evidence of an economic slowdown that they believe will force a pause.
The rally extended into Asia on Friday. Australian yields tumbled with traders there readying for next week’s central bank meeting, while New Zealand bonds rallied and their Japanese counterparts edged higher.
The global moves echoed what happened in the US Treasury market Wednesday, when yields fell sharply across the curve and traders priced in a half-point central-bank rate cut by the end of the year. Like its European peers, the Federal Reserve forecast additional hikes will be needed to restore price stability.
It’s a turnaround from last year, when investors hung on central bankers’ every word and dumped bonds in response to an aggressive campaign of rate hikes. And it suggests that the balance of power has shifted.
“Think of it in terms of central banks following markets as opposed to markets following central banks,” said Jack McIntyre, a portfolio manager at Brandywine Global Investment Management. “Central banks aren’t as important to markets as they were in 2022. That was the year of central banks. 2023 is the year of data.”
Euro-area policy makers raised rates Thursday by half a point to 2.5%, the highest since 2008, and signaled another 50 basis-point hike is coming in March. ECB President Christine Lagarde warned that underlying inflation pressures are still “alive and kicking.”
Traders weren’t convinced.
Italian debt led the surge in Europe, where the 10-year yield collapsed almost 40 basis points to 3.90%, the biggest drop since March 2020. Germany’s benchmark yield fell 20 basis points.
“Bond markets looked through her weak attempts at hawkishness, concentrating on the end-point of hikes, which appears close, to push yields down,” said Anna Stupnytska, a global macro economist at Fidelity International.
UK bonds also rallied sharply after a half-percentage-point hike from the BOE, accompanied by a warning from Governor Andrew Bailey that there was still a “long way to go” before the cost-of-living crunch is brought under control.
Bonds Hear Dovish Message in Powell’s Comments on Disinflation
In the US government bond market Thursday, yields declined further, sending the two-year to a fresh year-to-date low of 4.032% and longer-maturity yields within a few basis points of their respective lows.
The two-year remains the highest-yielding security in the Treasury market, reflecting expectations that the Fed’s eight rate increases since March 2022 have sown the seeds of an economic slowdown.
Swap contracts expect the Fed’s policy rate to peak at around 4.90% in June, while the December contract’s rate declined further to 4.37%, pricing in rate cuts totaling at least half a percentage point.
The bond market ignored the latest weekly drop in new jobless claims suggesting a still-tight labor market. The January employment report to be released Friday is expected to show a moderation in hiring last month to 190,000 from 223,000 in December.
–With assistance from Greg Ritchie.
(Updates with Asia bond moves Friday.)
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