(Bloomberg) — Benchmark Treasury yields were on track for their biggest drop since the early months of the pandemic and money markets canceled bets on a central bank rate hike amid fears the novel coronavirus could spread globally and slow economic growth.
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Money markets pushed back the timing of the Fed’s first 25 basis point rate increase to September from June, while briefly setting any further 2023 unit increases. The 10-year yield fell as much as 14 basis points, the biggest drop since March 2020 on a closing basis. .
It is a similar story in the UK where the Bank of England is now expected to tighten policy in February instead of next month. Bets that the European Central Bank will raise its deposit rate by the end of next year have also been lowered, pricing in a hike of just five basis points, about half of what was seen earlier this week.
The shift comes as countries including the UK and Israel imposed travel restrictions from South Africa and some neighboring countries after a new Covid-19 strain was discovered there. European Commission President Ursula von der Leyen said air travel from South Africa should be suspended “until we have a clearer understanding of the risks posed” by the alternative.
“Over the next two weeks, we can see this move continue,” Pooja Kumra, chief European interest rate analyst at Toronto Dominion Bank, said in an interview with Bloomberg TV. “For now we expect central banks to remain more sympathetic to the situation before removing any settlement.”
The prospect of widespread travel restrictions and renewed restrictions on social activity means that policy makers will have to think twice before starting to undo support, and traders taking the wrong position in order to increase prices. On Thursday, Goldman Sachs Group Inc. That the Fed would end its asset purchase program at an increased pace and raise interest rates three times next year, starting in June.
For months, central banks have been preparing the market for an era of tighter monetary policy as the global economy emerges from the pandemic and inflation accelerates. Friday’s bond rally comes after two- and five-year Treasury yields surged to their highest levels since the start of the pandemic earlier this week, with poor liquidity after a national holiday amplifying the moves.
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If the new pressure turns out to be as strong as it appears, it will “eliminate the need for monetary tightening that most central banks in developed markets have been leaning towards,” said Peter Chatwell, multi-asset strategist at Mizuho International Plc. It is expected that central banks will refrain from raising interest rates by about six months in this case.
Five-year government bond yields, considered the most sensitive to monetary policy, led the declines in the US and UK, falling by 18 basis points to 1.16% and 14 basis points to 0.60%, respectively. The market’s implied US inflation expectations eased, with the five-year Treasury inflation-protected securities break-even rate dropping 13 basis points to 2.93%, the lowest level since November 5.
Traders are also pushing back bets on monetary tightening in Central and Eastern Europe, among the first regions to react to higher prices as interest rates rise this year. Forward price agreements over the next 12 months slipped in Hungary, Poland and the Czech Republic by more than 20 basis points.
(Adds details about US bond market movements all the time.)
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