Bond markets rally on signs of cooling inflation

The bond rally showed no sign of waning in the second week of 2023. Indeed, the yield on the benchmark 10-Year U.S. Treasury Note fell 6 basis points from 3.56% to 3.50%. The yield curve is deeply inverted with the spread between the 2-year and 10-year yields at -73 basis points. Investors who trade in the Fed funds futures market now expect the central bank to stop hiking with a terminal rate slightly below 5% (4.90% in June). The Fed’s balance sheet has shrunk by $43bn since the beginning of the year.

In Europe, the yield on the German 10-year Bund slid 4 basis points to 2.17%. The French 10-year OAT yield was down 10 basis points from 2.72% to 2.62% while the UK 10-year Gilt lost 11 basis points from 3.48% to 3.37%.

Prices on corporate bonds continued to rise as anticipated last week. Investment grade corporate bond prices were up +0.62% in Europe (IBOXX € Liquid Corporates index) and up +1.80% in the U.S. (IBOXX Ishares $ Investment Grade Corporate Bond Index). High-yield bonds gained +1.38% in Europe (IBOXX € Liquid High Yield Index) and +1.37% in the U.S. (Markit iBoxx USD Liquid High Yield Capped Index).

Lastly, emerging debt in local currencies jumped 3.22%, benefitting from a weak dollar, while gold closed at its highest levels since April at $1,922/Oz.