Euro zone government bond yields reached a multi-week low on Thursday following the decisions by the Federal Reserve and the Bank of England (BoE) to leave interest rates unchanged. This has further strengthened the belief that central banks are nearing the end of their monetary tightening efforts. Adding to this positive sentiment, the US Treasury Department announced that it will slow down the increase in the size of its longer-dated auctions, which has relieved investors who were anticipating a larger supply.
Germany’s 10-year yield fell to its lowest level since September 15, dropping approximately 5 basis points (bps) to 2.70%. The two-year yield also hit its lowest level since September 4, falling as low as 3.01%. Similarly, Italy’s two-year yield dropped by 4 bps to 3.74%, reaching its lowest point in almost two months. The 10-year yield in Italy also hit a six-week low, last down 10 bps to 4.54%.
The Bank of England, in its efforts to combat the highest inflation among major economies, has chosen to maintain interest rates at a 15-year peak and has made it clear that it does not anticipate any rate cuts in the near future. The Federal Reserve, on Wednesday, also decided to keep policy rates steady and acknowledged that the recent increase in yields has tightened financial conditions. This aligns with market expectations that the US central bank has come to the end of its monetary tightening campaign.
Geoff Yu, Senior EMEA Market Strategist at BNY Mellon, commented on the Bank of England’s stance, stating, “The BoE is probably along the path that it expected and probably slightly frustrated that it is not further along.” He further noted that the movements in bond markets have already been beneficial, leading to discussions about investors re-entering the bond market, including longer-dated bonds.
Another positive sign in the rate markets was the narrowing spread between German and Italian 10-year yields, reaching 184.8 basis points after hitting 181, the tightest it has been since September 26. The yield differential had widened to 209 basis points in early October amid concerns about Italy’s increased budget deficit and a global sell-off in bond markets that had a greater impact on the more indebted periphery of the euro zone.
In Europe, the European Central Bank’s (ECB) chief economist Philip Lane expressed optimism that the economy can avoid a recession, despite a tightening credit market. ECB governing council member Klaas Knot also suggested that interest rates are likely to remain at their current levels in the coming months as the bank awaits further confirmation that inflation is on a downward trend.
British gilt yields followed the trend of their European counterparts, with the two-year yield reaching its lowest level since June.
US Treasuries also experienced a decline to multi-week lows, with the two-year note falling to a two-month low, last down 3.4 bps to 4.937%.
Overall, the recent decisions by central banks, along with the US Treasury’s announcement, have contributed to a favorable atmosphere in the bond markets. The expectation that monetary tightening is coming to an end has led to a decrease in yields and a narrowing of spreads. In addition, comments from ECB officials have added to the positive sentiment. British gilt yields have also seen a decline in line with their European counterparts. The future remains uncertain, but for now, investors are cautiously optimistic about the bond market.
More detail via Yahoo! Finance here… ( Image via Yahoo! Finance )