Bonds round-up: Gilts dive on US rate cut; treasuries soar
The unscheduled three-quarters of a point rate cut by the Federal Reserve had markedly different effects on bond markets either side of the Atlantic, with US treasuries advancing strongly while European bonds saw early rises reversed.
The emergency rate cut announced by the Fed has not prevented the US equity market from opening lower, and traders are betting that there are more rate cuts in the pipeline. Consequently demand for two-year treasuries went through the roof, pushing the yield on the benchmark 2-year treasury down 16 basis points to 2.18%.
The response of longer dated bonds was more sedate, with the benchmark 10-year treasury seeing its yield slide 4 basis points to 3.59%.
In Europe, traders were caught on the hop by the Fed's decision. Early gains were surrendered as prices quickly fell below overnight levels. The yield on the benchmark 10-year bund rose 9 points to 4%.
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In the UK the situation was much the same, with gilts plummeting into the red.
Richard Lambert, the director-general of the Confederation of British Industry, was moved to warn the Bank of England not to cut interest rates too far in the ensuing months for fear of stoking inflation.
Lambert, a former rate-setter himself at the Bank of England, said there were limits to how much the Bank of England could cut rates without losing its credibility.
He was speaking at a press briefing prior to the interest rate cut announcement by the Fed.
