(Bloomberg) — Global bond markets extended their rally that began after the Bank of England’s surprise decision to keep interest rates on hold, prompting traders to scale back expectations that policymakers would raise borrowing costs to cool inflation.
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Short-term securities were the hardest hit, with Australia’s three-year yield slipping toward its biggest weekly decline in nearly a decade. The US five-year bond yield has fallen near a three-week low, as UK bond yields of similar maturity have fallen the most since the Brexit vote. German 2-year bond yields fell to their lowest level in two months.
Traders are rethinking the possibility that central banks will abide by market expectations of monetary tightening. The BoE’s unexpected decision came just two weeks after Governor Andrew Bailey said “we have to take action” on accelerating inflation. It also came on the heels of statements from the Federal Reserve and the Reserve Bank of Australia this week that they will be patient about rate hikes.
“Price is a global market,” said Subhadra Rajappa, head of US price strategy at Societe Generale in New York. “Global central banks appear to be backing away from market expectations to take aggressive policy action.”
Australian three-year bond yields fell seven basis points on Friday to 0.90%. The yield is down 32 basis points this week, preparing for the biggest such drop since 2012 and giving up some of last week’s steepest gains in 20 years.
The two- and five-year US Treasury yields were little changed in early Asian trading after falling on Thursday by four and eight basis points, respectively. In the UK, yields for those periods fell by 21 and 19 basis points after policy makers upset markets by placing concerns about slowing growth above expectations of higher inflation. The yield on German 2-year Treasury bonds touched its lowest level since Sept.
The shift in sentiment prompted traders to bet on the pace of tightening by the Federal Reserve, which announced on Wednesday that it will begin reducing the pace of its asset purchase program this month. The interest rate futures contract, which was priced in two quarter-point increments in 2022, shifted the second to 2023.
The Fed’s meager interest rate, if it continues, will end asset purchases by the middle of the year. While Chairman Jerome Powell reiterated that the gradual decision bears no sign of interest rate policy, futures markets continue to price with a roughly 70% probability of rising in June, odds that haven’t changed much at this week’s policy meeting and beyond. .
The move in short-term Treasuries extends a period of high volatility, especially in the two-year US bond yields, which began two weeks ago as higher oil prices stoked inflation expectations. Globally, choppy government bond markets impacted leveraged positions, forcing many hedge funds to scale back trading.
The next major point of US data to focus on is the October jobs report on Friday, which is central to the Fed’s dilemma. While the inflation rate is “not at all consistent with price stability,” policy makers are not ready to raise interest rates “because we want to see the labor market recover more,” Powell said Wednesday.
The October report is expected to show a 450,000 increase in non-farm payrolls, which will be the largest since July.
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