Bond yields take a nosedive

Treasury yields slumped as data showing slowing inflation in the US stoked hopes for less hawkish Federal Reserve rate hikes in the near future. Consumer prices rose 7.7% from a year earlier, down from 8.2% in September. This is the lowest inflation rate since January. The 2-year Treasury yield fell from 4.65% to 4.33% while the 10-year yield lost 38 basis points at 3.82%. The 30-day Fed funds futures jumped to 95.16 (April 2023). The terminal rate is now well below 5%.

In Europe, the German 10-year yield lost 14 basis points over the week (2.16%) while the French OAT yield with the same maturity closed at 2.67% (-16 basis points). The Italy Government Bond yield also drifted lower (-25 basis points at 4.21%), reducing its yield premium over German bunds by as much as 11 basis points to 205 basis points. In the UK, the 10-year Gilt yield posted a 19bp drop (3.35%).

The fall in Treasury yields reverberated through all bond classes. Investment grade corporate bond prices were up +1.38% in Europe (IBOXX € Liquid Corporates index: -12.96% YTD) and up +3.17% in the US (IBOXX Ishares $ Investment Grade Corporate Bond Index: -18.06% YTD).

High-yield bonds gained +2.28% in Europe (IBOXX € Liquid High Yield Index: -9.92% YTD) and +1.43% in the US (Markit iBoxx USD Liquid High Yield Capped Index: -9.30% YTD).

Emerging debt rallied strongly as a weaker greenback tends to ease financial conditions for emerging countries. The iShares J.P. Morgan USD Emerging Markets Bond ETF gained 3.46% week-over-week (-21.20% YTD).