Euro zone government bond yields reached their lowest point in weeks on Thursday as the Federal Reserve and the Bank of England (BoE) announced that they would be leaving policy rates unchanged. This news has reinforced the speculation that central banks are nearing the end of their monetary tightening. Additionally, the Treasury Department revealed that it will be slowing the increases in the size of its longer-dated auctions, which has relieved some investors who had anticipated a larger increase in supply.
Germany’s 10-year yield dropped to its lowest level since September 15, decreasing by approximately 4.3 basis points (bps) to 2.70%. Meanwhile, the two-year yield fell to its lowest point since September 4, reaching 3.05%. Italy’s two-year yield remained relatively stable at 3.788%, after hitting its lowest point in almost two months. The 10-year yield also hit a six-week low, decreasing by 8 bps to 4.57%.
The BoE decided to maintain interest rates at a 15-year peak, as it continues its battle against the highest inflation among the world’s major economies. The central bank emphasized that it does not anticipate cutting rates anytime soon. On Wednesday, the Federal Reserve also left policy rates unchanged and acknowledged that the recent increase in yields had tightened financial conditions. These factors have further solidified market expectations that the US central bank is concluding its monetary tightening campaign.
Geoff Yu, Senior EMEA Market Strategist at BNY Mellon, commented on the situation, stating, “The BoE is probably along the path that it expected and probably slightly frustrated that it is not further along.” Yu also noted that the recent movements in bond markets have already worked in favor of the central banks. As a result, many investors are considering returning to bonds, including longer-dated bonds.
There has also been a narrowing of the spread between German and Italian 10-year yields, reaching 186.5 basis points after hitting 181. This is the tightest the spread has been since September 26. In early October, the yield differential had widened to 209 basis points due to concerns about Italy’s increased budget deficit and the sell-off in bond markets worldwide, which had a greater impact on the euro zone’s more indebted periphery.
In Europe, there were additional comments from European Central Bank (ECB) chief economist Philip Lane, who stated that there is still a “good case” for the economy to avoid a recession despite a tightening credit market. Dutch ECB governing council member Klaas Knot also mentioned that the ECB will likely maintain interest rates at their current levels in the coming months, as they await further confirmation that inflation is on a downward trend.
This positive sentiment in rate markets has also affected British gilt yields and US Treasuries, which have both followed the trend of their European counterparts.
More detail via Yahoo! Finance here… ( Image via Yahoo! Finance )