Bonds Rise Around World as Fed, Brexit Risk Set Scene for Easing
(Bloomberg) -- Global bonds rallied ahead of an expected interest-rate cut from the Federal Reserve and as traders raised bets on a disruptive no-deal Brexit for the U.K.
Gilt yields fell, dragging rates on German bunds and Treasuries lower, as markets raised bets on the Bank of England following the Fed and other global peers in cutting interest rates by next year. The move gained momentum as European Union President Jean-Claude Juncker said the risk of the U.K. leaving the bloc without a deal on Oct. 31 was “palpable.”
While the pound has suffered from the prospect of the U.K. crashing out of the EU, gilts have acted as a haven for investors, rallying along with other debt this year. The BOE’s policy outlook is being held hostage by Brexit uncertainty, just as the European Central Bank and Fed move to ward off a global slowdown.
“The extent of the hawkish re-pricing going into tonight’s Federal Open Market Committee means there is little advantage of still being short now,” said Antoine Bouvet, a senior rates strategist at ING Groep NV.
The yield on benchmark 10-year gilts fell four basis points to 0.65%, while their German and U.S. counterparts dropped three basis points each. Bonds held the gains after bidding at a German 30-year auction came in stronger than last month’s sale, which sparked a sell-off on fears that negative yields were hurting demand from funds.
The move was also bolstered by U.K. data showing inflation slowed to take it further below the BOE’s target, a day ahead of its policy announcement. While the BOE is expected to hold rates Thursday, money markets are now factoring in 17 basis points of rate cuts by the end of next year.
“Low inflation and hard Brexit are not a good combo,” said Jens Peter Sorensen, chief analyst at Danske Bank AS. “Gilts are not that expensive.”
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