Our fixed income team provide their update of recent market events
With the UK budget looming, gilts rallied through October – helped somewhat by an interest rate cut. There were also rate moves elsewhere, with the US and Canada cutting, while Japan and the ECB kept things on hold. Read on for a breakdown of fixed income news across sectors and regions.
Macro/government bonds
The US Federal Reserve (Fed) cut rates by 0.25% to 4% last week. Fed chair, Jay Powell, said that while conditions in the economy remain relatively resilient, they have noted a gradual cooling in the labour market. He characterised the rate cut as a risk management exercise, as the Fed brought monetary policy closer towards more neutral levels. He also remarked that a rate cut in December is not a foregone conclusion and that there were strongly differing views over how to proceed. On the news, two-year Treasury yields rose by 9bps to 3.57%. The market moved from fully pricing in a quarter point rate cut in December to around a 70% probability. The Fed also brought an end to sales of securities, citing higher short-term funding costs, ample bank reserves and – to date – a 50% reduction in the balance sheet.
In other rates news, the European Central Bank left rates on hold at 2% with inflation still close to their 2% target. The market had broadly anticipated this outcome, with yields at the two-year and 10-year tenors broadly unchanged over the week. The Bank of Canada announced a 25bps cut to 2.25%, signalling to markets that monetary policy had reached a more neutral stance. The Bank of Japan left rates on hold at 0.5% but, in a more hawkish shift, governor Kazuo Ueda stated that rates could rise as soon as December if wage and inflation data maintained upwards momentum. On this news the Canada 10-year rose 3bps on the week to 3.1% while the Japan 10-year rose 1bps to 1.67%.
Trade tensions between US and China dissipated as presidents Trump and Xi met in South Korea. The US dialled back tariffs from 57% to 47%, while China agreed to pause export controls on rare earths for one year. The easing of trade tensions supported risk assets.
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