Cost of government debt falls as investors seek out a safe haven and rein in rate expectations
The recent sell-off in government debt has eased slightly as investors reined in their expectations for how high interests would have to go following comments from Fed officials yesterday.
The yield on the 10-year US Treasury note fell to around 4.7 per cent today, down from 4.8 per cent at the end of last week.
In the UK, yields on the 10-year gilt fell to 4.5 per cent today from just over 4.6 per cent at the end of last week while yields on 10-year German Bunds – which serve as a benchmark for the eurozone – have fallen to 2.8 per cent from 2.9 per cent at the end of last week.
The rally was prompted by dovish comments from Fed officials yesterday, who suggested that rates would not have to go as high as previously anticipated.
Dallas Fed President Lorie Logan said that rates might not have to rise as far due to the recent surge in Treasury yields. This meant financial conditions had tightened “substantially in recent months“.
“If long-term interest rates remain elevated because of higher term premiums, there may be less need to raise the fed funds rate,” Logan said.
Fed Vice Chair for Supervision Michael Barr also said yesterday that the Fed had made “significant progress” on “bringing inflation toward the direction we want”.
Barr reassured investors after a blow-out jobs report last week which spooked markets, who feared further rate hikes would be necessary. Barr said the Fed is “not overly focused on one number coming in“.
The surprise assault on Israel by Hamas over the weekend also helped prompt the rally, with investors seeking risk-off assets.
“Government bonds still fulfil their role as a safe haven as geopolitical events unfold in the Middle East,” Padhraic Garvey and Benjamin Schroeder at ING commented.
For the previous couple of weeks, governments bonds – and US Treasuries in particular – have come under sustained pressure as markets increasingly bought into the idea that interest rates would have to remain higher for longer to stamp out stubborn inflation.
This sent yields on US government debt to their highest levels since just before the financial crisis. Yields rise when prices fall.