Treasuries Lead Global Bond Rally as Interest-Rate Bets Falter

(Bloomberg) -- Treasuries rallied, pushing 10-year yields below 3 percent for the first time since September, on speculation prospects are diminishing for global interest-rate increases next year. European bonds also gained.

U.S. money-market pricing showed traders had scaled back expectations for Federal Reserve hikes to just one in 2019, from as many as two estimated earlier this month, after Chairman Jerome Powell said borrowing costs are “just below” a range of estimates of the so-called neutral level.

Across the Atlantic, investors were already ruling out any rate increase next year by the European Central Bank amid stalling euro-area growth and elevated political risks, most notably from Italy. In the U.K., gilts rallied as the market-implied timing of the next Bank of England rate rise was pushed back by two months to May 2020.

Treasuries Lead Global Bond Rally as Interest-Rate Bets Falter

The bond rally gained momentum as a string of disappointing data from across the euro area buoyed demand for the safety of government debt. The Swiss and Swedish economies unexpectedly contracted in the third quarter, with output falling 0.2 percent in both amid a slowdown in domestic demand.

“Rates markets seem to be coming back down to earth,” said Richard Kelly, head of global strategy in London at Toronto-Dominion Bank. “This is almost the reverse of September when it was overreacting hawkishly and we kept pushing rates higher.”

Bunds’ Reign Among Best Global Assets Shows No Sign of Buckling

U.S. 10-year yields dropped as much as six basis points to just below 3 percent, the lowest level since Sept. 18. Rates on similar-maturity German bonds declined three basis points to 0.32 percent, and those on U.K. gilts fell five basis points to 1.33 percent.

Rate Expectations

The spread between Eurodollar futures expiring next month and those due a year later, a proxy for Fed rate hikes priced for 2019, slipped one basis point to 24 basis points, signaling a cut-back in tightening expectations.

In the U.K., BOE Governor Mark Carney warned Wednesday that the nation faces the steepest economic slump since at least World War II if it crashes out of the European Union without a deal. He defended the report in an interview with the BBC Thursday, adding that a transition agreement was vital for the economy.

The outlook for bunds, among this year’s best-performing assets globally, still remains positive for many in the market, with the ECB likely to face significant hurdles in its quest to normalize policy. Germany’s economy contracted for the first time since 2015 in the three months through September.

‘Risk Scenarios’

German sovereign bonds have been this year’s third-best performers out of 28 global assets ranked by NatWest Markets, which sees the securities remaining supported amid weakening growth momentum in the euro area. Commerzbank AG is also skeptical that yields will head higher, while Jefferies LLC plans to keep its holdings, even with the ECB set to discontinue fresh debt purchases by year-end.

“We have a range of risk scenarios from Brexit to Italy,” said Marilyn Watson, head of global fundamental product strategy at BlackRock Inc., citing uncertainty over the future path of interest rates. “A lot of investors are keeping their investments close to home.”

©2018 Bloomberg L.P.