Global Markets React as Bond Yields Drop to Six-Month Low, Anticipate Central Bank Rate Cuts

The 10-year Bund yield dropped by as much as 7 basis points to 2.28%, marking its lowest level since June 2.

On Tuesday, Germany’s 10-year government bond yield hit a six-month low, while global stock markets paused near four-month highs.

Traders were increasingly betting on European Central Bank (ECB) rate cuts in early 2024, and they were also grappling with the Federal Reserve’s outlook.

The 10-year Bund yield dropped by as much as 7 basis points to 2.28%, marking its lowest level since June 2.

This decline followed remarks from ECB official Isabel Schnabel during an interview with Reuters.

Schnabel stated that further interest rate hikes were “rather unlikely” due to an unexpectedly significant drop in inflation.

The movement of bond yields, which move inversely to prices, has been influenced by central bank policy rates.

Most developed markets globally saw government bonds under pressure in 2022 and earlier this year due to a rapid increase in central bank rates.

Andrzej Szczepaniak, a senior economist at Nomura, commented on Schnabel’s remarks, stating that they represented “the final nail in the coffin for further rate hikes,” even though no one had been expecting them.

Traders were now nearly fully pricing in a 25 basis point rate cut by the ECB at its March meeting and almost 150 basis points of cuts by the end of 2024.

The euro experienced fluctuations, ultimately settling slightly lower at $1.0829.

In the U.S., rate cuts were also anticipated, with traders considering a 50 basis point cut by June.

The 10-year U.S. Treasury yield was down by 5 basis points at 4.24%, retracing some of the previous day’s 6-basis-point rise.

Bank of Singapore strategist Moh Siong Sim noted that the market had priced in the soft landing scenario for the U.S. economy nearly perfectly, but there had been a reality check overnight.

Later in the week, important economic data releases were expected, including U.S. job openings data and non-farm payrolls data, which had shown signs of a job market slowdown in the previous month.

Equity markets retreated slightly on Tuesday, with the MSCI world index down 0.17%. Europe’s STOXX 600 index remained flat, while U.S. S&P 500 futures dipped 0.25%.

In Asia, the MSCI’s broadest index of Asia-Pacific shares outside Japan fell by 1.1%, with Hong Kong leading the decline.

China’s Hang Seng Index had declined more than 17% for the year, while global stocks were up nearly 15%, as investors moved away from Chinese assets amid economic challenges.

Moody’s, the ratings agency, had recently downgraded China’s government credit ratings outlook to negative from stable, citing lower medium-term economic growth and risks associated with a major correction in the country’s property sector.

Meanwhile, the Australian dollar experienced significant movement, falling 0.67% to $0.690, following the Reserve Bank of Australia’s decision to keep interest rates unchanged.

The RBA emphasized that future rate directions would depend on data, and this was seen as less hawkish than some market participants had expected.

Australia’s current account had also moved into deficit in the September quarter due to falling coal and gas prices, as indicated by recent data.

In commodity markets, Brent crude futures rose by 1% to $78.95 a barrel, partially recovering from a previous drop caused by doubts about further production cuts by producers.

Chicago wheat remained near its highest level since late August after the U.S. Department of Agriculture confirmed the largest one-off private sale to China in years.

Finally, gold remained above $2,000 after a volatile session that saw it reach a record high in Asia before retracting sharply.