Bonds rallied for a second day as traders bet an aggressive streak of global interest-rate hikes is close to ending, bolstered by optimism that inflation in the world’s biggest economy will continue to slow.
Short-dated bonds led the advance with two-year US Treasury yields falling as much as 14 basis points to 4.61%, the lowest level in nearly a month. The rate on similarly-dated UK securities also fell, taking a drop over the past two days to nearly 30 basis points, the biggest since March. Meanwhile, benchmark US 10-year US Treasury yields were down about 9 basis points to 3.77%.
The recent inflation data lifts “our level of conviction that the July hike will be the final one,” Deutsche Bank economist Justin Weidner wrote in a note with his colleagues, regarding the Federal Reserve’s upcoming policy actions.
Data Wednesday showed US consumer prices rose less than expected, undermining the case for more tightening. The consumer price index rose 3% last month from a year ago, the smallest advance in more than two years. Core CPI — which economists view as the better indicator of underlying inflation — advanced 4.8%, also the lowest since 2021.
On Thursday, US Treasuries extended the rally after a report showed US producer prices barely rose in June from a year earlier.
It was the moment bond bulls had been awaiting. Stronger-than-expected economic data out of the US and signs of sticky inflation in the UK had spurred a brutal selloff in the market over the past months, sending yields to multiyear highs.
“The bond rally currently has a strong momentum, which may bring some extension of the moves,” said Evelyne Gomez-Liechti, a rates strategist at Mizuho. A tight labor market and resilient services sector, however, still pose upside risks to the US inflation outlook, she added.
Amid the rally in global government debt, the US Treasury Department sold $18 billion in 30-year bonds at a rate of 3.91%. Despite the day’s gains, it was the highest 30-year auction yield since November.
US Treasury 30-Year Bond Yields 3.91% at Auction (Table)
In the US, the odds of another Fed hike after July are quickly receding. Traders are no long fully pricing another 50 basis points of hikes for the European Central Bank. And in the UK, they now see the Bank of England taking the key rate to as high as 6.25%, compared with a high of 6.5% priced earlier this week.
Comments from ECB officials Thursday encouraged the repricing. Governing Council member Ignazio Visco said “We’re not very far” from the peak in interest rates. His colleague Yannis Stournaras said the ECB’s plan to raise interest rates this month is not a “holy promise”.
“It’s time to begin extending duration as rates are likely near peak,” Shamik Dhar, chief economist at BNY Mellon Investment Management, wrote in a note. “Fixed income presents an attractive risk-return profile, especially relative to risk assets more sensitive to growth.”
A message from Advisor Perspectives and VettaFi: VettaFi’s Fixed Income Symposium is the biggest virtual event this summer. Register here and learn from experts and thought leaders how to navigate this unusual fixed income environment.
Bloomberg News provided this article. For more articles like this please visit
bloomberg.com.
