Our fixed income team provide their update of recent market events
The Argentine peso has taken a battering, but could the US ride to the rescue of Trump ally President Javier Milei? Elsewhere, interest rates dominated, with the Fed cutting and the BoE and ECB holding. Read on for a breakdown of fixed income news across sectors and regions.
Macro/government bonds
We saw a modest rise in yields across markets last week: the yield on the US 10-year rose by 7bps to 4.13%, while the yield on the UK 10-year rose by 3bps to 4.70%.
The US Federal Reserve (Fed) cut interest rates by 0.25% to 4.25% in line with market expectations. Fed chair, Jay Powell, pointed to a softening US labour market, characterising the current environment as ‘low firing, and low hiring’. This combination has helped keep a lid on the unemployment rate.
The Fed also published its summary of economic projections, in which policy makers make individual forecasts for the economy and the Fed funds rate. The median estimate showed a decline in policy rate to 3.6% by year-end and to 3.1% by the end of 2027.
The Bank of England (BoE) left interest rates on hold at 4%, justifying its decision on the need to balance upside risks to inflation with downside risks to demand. Although the trajectory for bank rate remains downward over the next 12 months, the Bank emphasised the importance of ‘gradualism’ in its approach to easing monetary policy. The Bank also announced it would reduce the pace of asset sales over the next year from £100 billion to £70 billion, while shifting the focus of sales away from longer-dated gilts. This news disappointed hopes of a larger cut and put upwards pressure on gilt yields.
European Central Bank policy makers Joachim Nagel and Isabel Schnabel pushed back against further rate cuts in the eurozone, arguing that inflation risks remained tilted to the upside.
Positioning Last week, as a defensive measure, we scaled back our yield curve steepening positions and reduced our long duration exposure.
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The Bank of Japan also voted to keep policy rates on hold, although the market continues to price for another rate hike by December given the elevated level of inflation in the country.