Government bonds snapped a 13-week losing streak

Government bonds snapped a 13-week losing streak. Even if a fourth consecutive 75bp rate hike from the Federal Reserve is fully priced by financial markets, investors expect that the central bank language will be a little softer next week, keeping the option open for slower hikes ahead (50bp in December for instance). A view that got some traction recently (cf. San Francisco Fed President Mary Daly’s dovish comments last week). Should the Fed confirm a 75bp rate hike on 2 November, the effective funds rate would move up to 3.83% (3.08% + 0.75%), compared with the 4.8% terminal rate currently expected by financial markets (according to Fed funds futures). Last week, Former Treasury Secretary Larry Summers tweeted that the increase in the terminal rate to above 5% is “a kind of milestone.” 

For the week, the yield on the 10-year Treasury retreated 21 basis points to 4.01% from 4.22%. The UTEN single bond ETF that invests in the 10-year US Treasury note was up 1.97% (down 1.70% month-to-date). The 2-year Treasury yield closed at 4.41%, falling by around 7 basis points.

In Europe, the ECB raised interest rates by 75 basis points as expected. The German 10-year yield lost 32 basis points over the week (2.10%) while the French OAT yield with the same maturity closed at 2.60% (-39 basis points). The Italy Government Bond 10Y outperformed, reducing its yield premium over German bunds by as much as 31 basis points to 205 basis points. In the UK, Rishi Sunak’s nomination as prime minister was broadly welcomed by investors. The UK 10-year Gilt yield slipped by about 62 basis points to 3.47%. The GBP-USD spiked after the confirmation. One pound could buy a little more than $1.16, up 2.46% on the week.

Falling yields gave a boost to the riskiest bond classes. Investment grade corporate bond prices were up +2.08%¹ in Europe (-13.78% year-to-date) and up +2.38%² in the U.S. (-20.89% year-to-date). High-yield bonds gained +1.67% in Europe³ (-12.39% year-to-date) and +2.74% in the U.S.⁴ (-9.29% year-to-date).

Emerging debt⁵ also rallied (+1.71% in local currencies, -21.44% year-to-date).

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¹ Markit iBoxx Euro Liquid Corporates TR Index 

² Bloomberg Barclays Global Aggregate Corporate Bond TR Index

³ Markit iBoxx EUR Liquid High Yield TR Index

⁴ Markit iBoxx USD Liquid High Yield Capped TR Index 

⁵ Bloomberg Barclays Emerging Markets TR Index