Global bonds rally as investors home in on central bank inflation signals

A global bond rally gathered momentum on Thursday after the Bank of England and European Central Bank joined the Federal Reserve in hinting that they may be nearing the end of their cycle of rate rises.

The BoE’s half percentage point interest rate rise was widely anticipated by investors, though the bank’s statement that any further increases would require evidence of “more persistent” inflationary pressures knocked the pound, which traded 0.6 per cent lower against the dollar at $1.230 shortly after the decision.

The ECB raised rates by the same amount and said it intended to replicate the move at its next meeting in March, “opening the door to either a pause or a slower rate hike” after that, said Carsten Brzeski, global head of macro at ING.

Government bonds have rallied this year and had strengthened further by early afternoon in Europe, with the yield on the 10-year German Bund, a regional benchmark, down 0.17 percentage points to 2.12 per cent. The yield on the equivalent UK and Italian government bonds fell 0.20 percentage points and 0.24 percentage points, respectively, following a rally in US Treasuries in the previous session.

The moves followed earlier rises for European stocks and US futures, building on Wednesday’s gains on Wall Street, as investors reacted to comments from Fed chair Jay Powell following a broadly anticipated quarter-point increase in US interest rates.

The region-wide Stoxx Europe 600, up 6 per cent over the past month, added 0.9 per cent, while London’s FTSE stood 1 per cent higher shortly after the ECB’s announcement.

Contracts tracking Wall Street’s benchmark S&P 500 rose 0.9 per cent and those tracking the tech-heavy Nasdaq 100 added 1.9 per cent ahead of the New York open. Shares in Meta surged 20 per cent in pre-market trading on stronger than expected fourth-quarter revenue and a promise from chief executive Mark Zuckerberg that 2023 would be “the year of efficiency”.

Stocks have climbed and bond yields are down this year on rising optimism of stronger global growth and signs of cooling inflation, with markets further buoyed on Wednesday by comments from Powell that investors viewed as dovish.

“Reading between the lines of [Powell’s] remarks, we see the first baby steps towards a looming pause in rate hikes following the expected March hike, and ultimately a pivot to rate cuts later this year,” said analysts at Bank of America.

The S&P 500 rose to its highest level since August on Wednesday after the Fed opted to raise rates by a quarter percentage point, ending a run of half- and three-quarter-point moves and taking the federal funds rate to between 4.5 and 4.75 per cent.

The dollar index, which tracks the US currency against a basket of six currencies, traded flat, having slipped more than a tenth in the past three months as the pace of interest rate rises has slowed.

Markets expect the Fed to replicate Wednesday’s move when officials meet in March and Powell gave investors little reason to think otherwise during a Q&A session with journalists late in the day, maintaining that “ongoing increases in the target range will be appropriate”.

Powell acknowledged that “for the first time the disinflationary process has started” in consumer goods, which markets interpreted as dovish, but he added that disinflation had yet to set in across the core services ex-housing part of the price index. Despite a slowdown in economic growth, the labour market remained “extremely tight”, Powell said.

Unlike the Fed, however, markets expect March’s rate rise to be the central bank’s last and are pricing in the possibility of rate cuts in late 2023. “We’ll just have to see,” Powell said.

Barclays analysts said Powell’s press conference “sent mixed messages, reiterating that the committee’s work is not done, but showing reluctance to lean against easing financial conditions”.

In Asia, Hong Kong’s Hang Seng index dipped 0.5 per cent, China’s CSI 300 slipped 0.3 per cent and Japan’s Nikkei rose 0.2 per cent.