Wind in the sails for bond markets

The Federal Reserve announced Wednesday that it raised its key federal funds rate by 0.25% to a range of 4.5%-4.75%. Though Powell said there is more work to do before pausing the Fed’s rate hike cycle, traders bet that the Fed could put its aggressive tightening campaign on hold sooner than expected. Fed funds futures suggest that the terminal rate will hit just under 5% in June this year.

The benchmark 10-year T-note yield remained virtually unchanged week-over-week at 3.52% after losing 13 basis points following Powell’s speech. It leaped on Friday in the wake of a strong U.S. jobs report. Nonfarm payrolls surged by 517,000 jobs in January, well above the 185,000 market estimate.

In Europe, the yield on the German 10-year Bund fell 5 basis points to 2.19% while the French OAT yield with the same maturity closed at 2.65% (down 6 basis points too). 

The corporate bond rally showed no sign of waning. Investment grade corporate bond prices were up 0.74% in Europe (IBOXX € Liquid Corporates index) and up 0.41% in the U.S. (IBOXX Ishares $ Investment Grade Corporate Bond Index). High-yield bonds posted their sixth weekly rise in a row in Europe (IBOXX € Liquid High Yield Index up +1.04%). They added 0.90% in the U.S. (Markit iBoxx USD Liquid High Yield Capped Index). Emerging debt in local currencies edged up 0.04% while the dollar index bounced back to 103.