Sharp Decline for US T-Notes

Government bonds experienced a sharp decline after the US economy grew stronger than expected in the second quarter and the Fed raised its key interest rate by 25 basis points, bringing the benchmark borrowing rate to a range of 5.25%-5.5%. US GDP rose at a 2.4% annualized pace in the April-through-June period, topping the 2% estimate.

Federal Reserve Chair Jerome Powell during Wednesday’s press conference suggested that rate cuts are unlikely to come this year. Fed fund futures (December 2023) closed at 94.605. The U.S. 10-year Treasury yield gained 12 basis points from 3.84% to 3.96%. The yield on the U.S. 2-year Treasury rose 4 basis points, from 4.85% to 4.89%, bringing the 10-2 year yield spread to -0.93%.

The Fed tightening monetary policy is also reflected by its balance sheet trend. The US central bank shrunk it by nearly $100 billion in July from $8,341 billion (as of 28 June) to $8,243 billion (as of 26 July).

In Europe, the ECB raised interest rates by 25 basis points on Thursday to a 23-year high, hence a 400bp rate hike since July last year, the fastest tightening cycle on record for the eurozone. Accordingly, the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will be increased to 4.25%, 4.50%, and 3.75% respectively, with effect from 2 August 2023. That said, President Christine Lagarde surprised the market by hinting that this tightening run could soon be coming to an end. The yield on the German 10-year Bund edged up 2 basis points from 2.47% to 2.49%. The same trend for the France 10-year OAT yield, up 4 basis points from 2.985% to 3.025%.

Against this backdrop, investment grade corporate bonds exhibited mixed results. In Europe, the IBOXX € Liquid Corporates index inched up by 0.06%. In the U.S., the IBOXX $ Domestic Corporates index slid 0.66%.

High-yield bonds advanced 0.36% in Europe (IBOXX € Liquid High Yield Index) and were up 0.10% in the U.S. (Markit iBoxx USD Liquid High Yield Capped Index).

Emerging debt in local currencies gained 0.43%.

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