Global bonds rally as Fed hike bets ease

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    NEW YORK/LONDON – Major sovereign bonds rallied across the globe on Monday and the US 10-year yield backed off from its recent high after a surge that shook up global markets last week.

    Benchmark US Treasury yields eased for a second consecutive session on Monday after climbing to a one-year high last week as Federal Reserve officials continued to downplay runaway inflation concerns, though a round of solid economic data curbed the decline.

    Other central banks, meanwhile, suggested they are unlikely to tolerate a rise in yields.

    TD Securities in a research note said it sees a year-end forecast of 1.45 percent for US 10-year yields.

    “We believe that any further rise in rates will significantly tighten financial conditions and could therefore be self-limiting,” TD wrote.

    Federal Reserve Bank of Richmond President Thomas Barkin said on Monday there is no indication that inflation expectations are moving beyond a reasonable range. Meanwhile, the Reserve Bank of Australia on Monday made larger-than-expected asset purchases while European Central Bank policymaker François Villeroy de Galhau said the recent rise in bond yields was unwarranted and the ECB needs to push back using the flexibility embedded in its bond purchase program.

    In Australia, 10-year bond yields tumbled as much as 22 basis points after the Reserve Bank of Australia announced a larger-than-usual 4 billion Australian dollars ($3.1 billion)worth of bond purchases, its second such move in as many days.. But Aussie bond yields were last slightly up at 1.671 percent. “This development may well be having a positive demonstration effect in terms of bolstering confidence that central banks are likely to push back against yield moves which they worry may be unwarranted,” Rabobank analysts led by Richard McGuire told clients. Many markets had already shown signs of calming on Friday and sentiment held up on Monday, with sovereign bond yields in Asia, the United States, and the euro area all starting the week lower. The outperformance of Australian bonds, in terms of prices, which were poised for their best daily performance since the COVID-19 market rout last March, underscored market analysts’ impression that verbal intervention by central banks would not be enough to drive yields much lower after sharp rises.

    Monday’s moves were also explained by a rally in eurodollar futures, which investors use to bet on future interest rate moves, Rabobank analysts said. They showed an unwinding of some of the moves last week that priced in a Federal Reserve rate hike in early 2023.

    Eurodollar futures on Monday have fully priced in a US rate hike by June 2023, from March 2023 last Friday.

    In the United States, Treasuries underperformed and by midday the benchmark 10-year yield was down at 1.447 percent.

    US five-year bond prices posted the biggest gains, with yields down 5 basis points at 1.123 percent. – Reuters