Bonds round-up: Rate cut hopes boost bonds
Not content with this week's emergency 75 basis points cut in interest rates by the Federal Reserve, US investors are betting the Fed will cut rates again next week in order to head off the prospect of a recession in the US economy.
Futures contracts indicate traders regard a rate cut next week as a one-hundred per cent certainty, with a half-point cut the most widely expected outcome. Analysts said the expectation of reduced consumer spending will remove some of the inflation risk from the economy, thus giving the Fed scope to cut interest rates more vigorously.
The continued decline of US equities also boosted demand for government debt with the yield on the benchmark 10-yeeasury note sliding 9 basis points to 3.35%.
In Europe, investors were similarly focussing on interest rate cuts, with pressure growing on the European Central Bank to sanction a cut in the near future.
The yield on the benchmark 10-year bund dived 10 basis points to 3.89% as investors continued to spurn
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In the UK, minutes from the most recent Bank of England rate setting meeting showed policymakers voted 8-1 in favour of keeping interest rates on hold at 5.5% earlier this month.
Worries about inflation convinced the majority to vote against the lone dissenter David Blanchflower at the January 10 get together.
Despite this, demand for gilts was strong, helped by further evidence of slowing economic growth in the UK. The yield on the benchmark 10-year gilt was pushed down 7 basis points to 4.42%.
UK economic growth eased during the fourth quarter to its slowest pace in over a year, although that was still slightly more than analysts had expected.
Data from the Office for National Statistics showed the economy grew 0.6% in the final three months of the year, less than the 0.7% seen in the third quarter, but more than the 0.5% predicted.
