Global bonds rally as investors bet peak in interest rates is near
ECB and BoE join Fed in hinting they may be approaching the end of rate-rise cycle
A global bond rally gathered momentum on Thursday after the Bank of England and European Central Bank joined the Federal Reserve in hinting that they may be nearing the end of their cycle of rate rises.
Both the BoE and the ECB raised borrowing costs by half a percentage point, following Wednesday’s smaller quarter-point rise by the Fed. While all three moves were widely expected by markets, investors seized on signs that rates may be close to peaking on both sides of the Atlantic to pile into government debt.
Wall Street stocks built on the previous days gains, following an earlier rally in Europe.
“Markets wanted to rally and are getting very excited, looking past anything slightly more hawkish” said by officials at the three central banks, said Matthew Rees, head of global bond strategies at Legal & General.
The yield on the 10-year German Bund, a regional benchmark, slipped 0.19 percentage points to 2.10 per cent, while the yield on the equivalent UK and Italian government bonds fell 0.21 percentage points and 0.34 percentage points respectively, following a rally in US Treasuries in the previous session.
The BoE’s half percentage point interest rate rise was widely anticipated by investors, though the bank’s statement that any further increases would require evidence of “more persistent” inflationary pressures knocked the pound, which traded 0.8 per cent lower against the dollar at $1.227 shortly after the decision.
The ECB later raised rates by the same amount and said it intended to replicate the move at its next meeting in March, “opening the door to either a pause or a slower rate hike” after that, said Carsten Brzeski, global head of macro at ING.
The euro fell 0.9 per cent against the dollar to $1.089. In equity markets, the region-wide Stoxx Europe 600 added 1 per cent, while London’s FTSE stood 0.6 per cent higher.
The moves followed Wednesday’s gains on Wall Street, which were triggered in part by Fed chair Jay Powell’s comments at a question-and-answer session with journalists.
“Reading between the lines of [Powell’s] remarks, we see the first baby steps towards a looming pause in rate hikes following the expected March hike, and ultimately a pivot to rate cuts later this year,” said analysts at Bank of America.
Wall Street’s benchmark S&P 500 hit its highest level since August in the previous session and rose a further 0.7 per cent early on Thursday. The tech-heavy Nasdaq 100 climbed 2.2 per cent to its highest point since September. Shares in Meta surged 19 per cent on stronger than expected fourth-quarter revenue and a promise from chief executive Mark Zuckerberg that 2023 would be “the year of efficiency”.
The dollar index, which tracks the US currency against a basket of six currencies, traded 0.5 per cent higher, having slipped more than a tenth in the past three months as the pace of interest rate rises has slowed.
Powell used his press conference to acknowledge that “for the first time the disinflationary process has started” in consumer goods, which markets interpreted as dovish, though he added that disinflation had yet to set in across the core services ex-housing part of the price index. Despite a slowdown in economic growth, the labour market remained “extremely tight”, Powell said.
Unlike the Fed, however, markets expect March’s rate rise to be the central bank’s last and are pricing in the possibility of rate cuts in late 2023. “We’ll just have to see,” Powell said.
Barclays analysts said Powell’s press conference “sent mixed messages, reiterating that the committee’s work is not done, but showing reluctance to lean against easing financial conditions”.
In Asia, Hong Kong’s Hang Seng index dipped 0.5 per cent, China’s CSI 300 slipped 0.3 per cent and Japan’s Nikkei rose 0.2 per cent.