Treasury yields stabilize

After the best start to a year for bond markets, U.S. Treasuries showed signs of stabilizing. The yield on the benchmark 10-year Treasury note settled at 3.48%, down from 3.50% a week ago. The spread between the 2-year and 10-year yields fluctuated around -70 basis points. It is highly likely that the Fed will hike rates by 25 basis points at its next policy meeting on January 31 - February 1. Indeed, Governor Christopher Waller, a hawkish official at the U.S. central bank, joined other policymakers in backing another moderation in the size of rate increases. The terminal rate remained unchanged below 5% (Fed funds futures at 95.10 in June).

In Europe, the yield on the German 10-year Bund edged up one basis point to 2.18%. European Central Bank President Christine Lagarde said inflation remains far too elevated. As a result, the ECB will leave interest rates in restrictive territory for as long as it takes to bring down inflation to its 2% target.

By contrast, the Bank of Japan maintained its dovish policy after its two-day meeting, defying market expectations that higher inflation could force the Policy Board to move away from low interest rates. Instead, the central bank decided to continue to set short-term interest rates at -0.1% and guide 10-year yields to around 0%, through its yield curve control program.

Prices on corporate bonds continued to rise for the third week in a row, though to a lesser extent. Investment grade corporate bond prices were up +0.16% in Europe (IBOXX € Liquid Corporates index) and up +0.23% in the U.S. (IBOXX Ishares $ Investment Grade Corporate Bond Index).

High-yield bonds were mixed. They gained +0.22% in Europe (IBOXX € Liquid High Yield Index) and lost -0.49% in the U.S. (Markit iBoxx USD Liquid High Yield Capped Index).

Lastly, emerging debt in local currencies edged down -0.27% while the dollar index was virtually unchanged and gold extended its winning streak for the fifth straight week. The yellow metal closed at its highest levels since April at $1,928/Oz.

Against this backdrop, it’s worth noting that global bond issuance hit a record of nearly $590 billion in January, meeting with high demand across all regions.