Bonds rally as bets on rate cuts intensify

Singapore/London — Germany’s 10-year government bond yield dropped to the lowest in six months on Tuesday and world shares paused around four-month highs as traders added to bets on European Central Bank rate cuts early in 2024 and grappled with the Federal Reserve’s outlook.

The 10-year bund yield dropped as much as 7 basis points to 2.28%, the lowest since June 2, after European Central Bank official Isabel Schnabel said in an interview that further interest hikes are “rather unlikely” after an unexpectedly big drop in inflation.

Bond yields move inversely to prices and government bonds in most developed markets globally took a battering in 2022 and earlier this year after a rapid rise in central bank policy rates.

“The final nail in the coffin for further rate hikes, even if no-one was expecting any,” Andrzej Szczepaniak, senior economist at Nomura, said of Schnabel’s comments.

Traders are now nearly fully pricing in a 25 basis-point rate cut from the European Central Bank at its March meeting, and nearly 150 basis points (bps) of cuts by the end of 2024.

The euro dipped, recovered and was last slightly weaker at $1.0829.

Rate cuts are also expected in the US with traders seeing 50 bps of cuts as more likely than not by June. The 10-year US treasury yield was down 5 bps points at 4.24%, walking back some of the previous day’s 6-point rise.

“The market has more or less priced the soft landing scenario [for the US economy] to perfection,” said Bank of Singapore strategist Moh Siong Sim said. “Overnight there was a bit of a reality check — maybe it was too ambitious.”

US job openings data is due at 3.30pm GMT, and the week’s most important data release, US non-farm payrolls data, which last month showed signs of a slowdown in the job market, are scheduled for Friday.

Equity markets retreated somewhat on Tuesday with the MSCI world index down 0.17%, edging below Monday’s four-month high after a storming November when the expected rate cuts powered stocks higher in the US and Europe.

Europe’s broad Stoxx 600 index was flat, though US S&P 500 futures dipped 0.25%. Earlier in the day, MSCI’s broadest index of Asia-Pacific shares outside Japan fell 1.1%, driven mostly by Hong Kong’s Hang Seng, which fell 1.9%.

The Hang Seng is down more than 17% so far this year, while world stocks are up almost 15%, as investors have streamed out of Chinese assets while the economy stumbles.

Late in Asian trading, ratings agency Moody’s cut its outlook on China’s government credit ratings to negative from stable, citing lower medium-term economic growth and risks from a major correction in the country’s vast property sector.

Dovish Reserve Bank of Australia

The Australian dollar was the biggest mover among developed market currencies, weakening 0.67% to $0.690 after the Reserve Bank of Australia left interest rates on hold as expected, but emphasised that the future direction rates would depend on data.

“We suspect that markets were expecting a more hawkish statement given the unusually long time before the next [RBA] meeting on February 6,” said Lenny Jin, global FX strategist at HSBC.

“The RBA did not forcefully push against the ongoing trend of easing financial conditions that has occurred globally since November.”

Falling coal and gas prices pushed Australia’s current account into deficit in the September quarter, data on Tuesday shows.

In commodity trading, Brent crude futures traded 1% higher at $78.95 a barrel, having fallen overnight on doubts that producers will make further cuts to output.

Chicago wheat held near its highest level since late August after the US department of agriculture confirmed the largest one-off private sale to China in years.

Gold hung on above $2,000 after a wild session on Monday, when it hit a record high in Asia before recoiling sharply lower.

Reuters