Global bonds, including US Treasuries, experienced a rally, driving benchmark yields to multi-month lows as traders speculated on a potential new disinflationary phase and increased bets on more interest-rate cuts in the upcoming year. The US 10-year Treasury yields, considered the global risk-free rate, fell to their lowest since July, declining over one percentage point from the October peak of 5.02%. Simultaneously, German Bund and UK gilt yields dropped significantly, with the latter reaching its lowest point since April, following softer-than-expected UK inflation data.
The market response was fueled by the belief that the global economy is entering a disinflationary period, prompting expectations of aggressive monetary-policy easing by major central banks in 2024, particularly the Federal Reserve. Swaps traders have adjusted their forecasts for the US central bank, predicting around 150 basis points (equivalent to six quarter-point rate reductions) in cuts next year.
Tom Porcelli, Chief US Economist at PGIM Fixed Income, expressed the view that the Fed would implement rate cuts in the next year, leading to a growth slowdown of around 1%, which could feel recessionary for some. He emphasized the lack of meaningful catalysts to break out of a potentially sluggish growth backdrop in the next year or two.
Across Treasury maturities, rates were lower on Wednesday, with short-tenor debt experiencing more pronounced declines. The 10-year note hovered around 4.34%, marking a decrease of approximately 10 basis points.
The US long-term yields recovered slightly after the Treasury’s auction of $13 billion of 20-year bonds, which exhibited tepid demand. The sale resulted in a slight tail, indicating a yield premium over the pre-auction trading level. Ira Jersey, Chief US Interest-Rate Strategist at Bloomberg Intelligence, described the auction as mediocre to slightly weaker, highlighting weaker demand and the lowest bid-to-cover in recent months.
Looking ahead, market attention will focus on GDP revisions on Thursday and personal spending data on Friday, including the Fed’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) index.
In the UK, consumer prices rose 3.9% in November from a year earlier, slightly lower than the previous month. Goldman Sachs adjusted its expectation for the first Bank of England rate cut to May from June. Expectations for the European Central Bank (ECB) are more aggressive, with 162 basis points priced in, reflecting concerns about worsening economic data and slowing inflation in the eurozone.
Charles Diebel, Head of Fixed Income at Mediolanum International Funds, anticipates a correction in the market but emphasizes the likelihood of the ECB being the first to reverse hikes, leading to lower medium-term yields.
