Our fixed income team provide their update of recent market events
The European Central Bank is contending with increased fiscal spending and a massive shift in the Dutch pension system, leaving markets seeking clarity. Read on for a breakdown of fixed income news across sectors and regions.
Macro/government bonds
Last week, US 10-year yields fell 5bps to 4.01%, German 10-year yields fell 2bps to 2.69%, and UK 10-year yields fell 11bps to 4.44%. The trigger for the move lower in the US was, as discussed below, increased market expectations of a December rate cut, while in the UK the decline reflected a positive reaction to the UK budget after pre-budget scares, coupled with news of planned reduced long-end issuance.
Economic data from the US was weak this week. The Federal Reserve’s Beige Book and consumer confidence data pointed to declining consumer spending, margin compression and a softening labour market. Market pricing of a quarter point rate cut in December rose from a probability of 75% to 88% during the week.
Meanwhile, the UK government delivered a budget that combined welfare spending increases with back-loaded tax rises. The expected broadening of the higher rate tax base over the next five-year period meant that the chancellor, Rachel Reeves, could increase her fiscal headroom to £22 billion by 2029-30. This was greeted positively by gilt market participants who had been expecting a smaller estimate of headroom.
Eurozone bond yields were barely changed as European Central Banks officials argued that eurozone interest rates were appropriate.
The Reserve Bank of New Zealand cut its cash rate from 2.50% to 2.25% to combat growing spare capacity in the economy. Conversely, the governor of the Bank of Japan, Kazuo Ueda, hinted that the central bank could move as soon as December to tighten monetary policy.
Positioning The global rates desk took profits on a long-duration position in gilts. However, we still retain a yield curve steepening position in the gilt market, as well as steepening positions in euro and US bond markets.
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