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Investors have piled into US and European government debt after the US Federal Reserve and other central banks signalled a possible end to the rate rise cycle that has hammered the bond market for more than a year.
In one of the biggest drops in borrowing costs since Silicon Valley Bank’s failure in March, investors pushed down the yield for 10-year US Treasuries, a benchmark for global asset prices, by more than 0.3 percentage points in two days.
Government bond markets also rallied across Europe, a shift that, if sustained, could have profound implications for governments’ and companies’ cost of capital after a long sell-off that has hit bondholders hard.
The bond rally supported stock markets, with the S&P 500 index rising 1.4 per cent in the US — making Thursday one of the most upbeat days in the market since March.
The fall in the US 10-year Treasury yield, which moves inversely to price, came after what investors viewed as dovish remarks by Fed chair Jay Powell on Wednesday.
Earlier in the day the central bank kept its benchmark funds rate on hold at between 5.25 per cent and 5.5 per cent.
Solita Marcelli, chief investment officer for the Americas at UBS Wealth Management, said: “The meeting underlines our view that the Fed is likely done tightening and that markets had become too aggressive in pricing higher rates for longer.”
Powell emphasised the Fed was “proceeding carefully” with future rate rises, which investors took as a sign bond markets have largely succeeded in slowing down the US economy.
However, he also warned the central bank “was not confident yet” that monetary policy was sufficiently restrictive to bring inflation back to its 2 per cent target.
The scale of the investor reaction to the Fed chair’s comments underlined how anxious many are to see the end of the monetary tightening that increased borrowing costs for households and businesses across the world.
Previous Fed rises and a big expansion in the US government’s borrowing plans had contributed to the prolonged sell-off that last month pushed 10-year yields above 5 per cent for the first time in 16 years.
In Wednesday’s rally, US 10-year yields fell 0.19 percentage points — the biggest one-day drop since SVB’s collapse, according to Bloomberg data. They slid an additional 0.12 percentage points on Thursday to reach 4.67 per cent.
Investors have been wrongfooted in the past by prematurely calling an end to the Fed’s rate rise cycle.
But Tiffany Wilding, managing director at bond investment house Pimco, argued Powell’s comments on Wednesday did not appear to be preparing the market for a possible rate rise in December “and as a result you are getting some loosening in financial conditions”.
The Treasury department also pulled US government bond yields lower after it announced on Wednesday it would slow the pace at which it issues longer-dated debt.
UK gilts also advanced after the Bank of England announced on Thursday it would hold rates at 5.25 per cent.
Two-year gilt yields, which reflect interest rates expectations, fell 0.09 percentage points to 4.70 per cent, the lowest level since June. Benchmark 10-year gilt yields fell 0.15 percentage points to 4.35 per cent.
Ten-year German bond yields — the benchmark for the eurozone — slipped 0.05 percentage points to 2.7 per cent after jobs data suggested the country’s economy was stagnating.