Expecting interest rate changes, global bond prices increased the most since 2008

Global bond markets are growing at their strongest pace since the 2008 global financial crisis, and the driving force for this recovery is a change in investor expectations about the monetary policies of the central banks, especially the US Federal Reserve (Fed).

A Bloomberg news agency index measuring global government and corporate bond prices rose 4.9% in November, on pace to complete the strongest monthly gain since a 6.2% increase recorded in November. December 2008, when the world economy was plunged into deep recession by the financial crisis.

Investors believe that the Fed and major central banks around the world have basically completed raising interest rates and will begin cutting interest rates from next year. On November 28, Fed Governor Christopher Waller helped investors strengthen this expectation when he expressed confidence that monetary policy “has now reached an appropriate state” to slow the economy down. and inflation returned to the 2% mark – the Fed’s target.

“Mr. Waller is a Fed official with a strong stance, so the fact that he appeared soft is an important event. It seems like Fee is almost done raising interest rates,” portfolio manager James Wilson of Jamieson Coote Bonds Pty told Bloomberg.

Bond yields are calculated by coupon yield divided by bond price, so when bond prices increase, yields decrease. In the trading session on November 29 in the Asian market, the yield on 10-year US Treasury bonds sometimes decreased by 6 basis points to 4.26%, while the yield on the 2-year term decreased by 7 points. basically about 4.67%. Yields on Australian government bonds fell 14 basis points at one point, after weaker-than-expected inflation data in the country prompted traders to bet that the Central Bank of Australia (RBA) would not raise interest rates. further.

The rally is the latest twist in a volatile year for global bond markets. Bond prices rose sharply in January this year, struggled for the next six months, then entered a precipitous three-month decline starting in August. When it bottomed out in mid-October, the Bloomberg Global Aggregate index Total Return Index decreased 3.8% since the beginning of the year. Currently, the index has increased 1.4% since the beginning of the year.

“The Fed is setting parameters for the possibility of loosening monetary policy,” said chief strategist Gregory Faranello of AmeriVet Securities.

The last time the global bond market rose stronger than this month was December 2008, when the Fed cut interest rates to zero and pledged to pump money into financial markets after the collapse of the investment bank. Lehman Brothers. At that time, Bloomberg’s global bond price index increased by 6.2%.

Recent investor expectations of a shift toward softness by central banks have given a big boost to corporate bond prices. The spread between investment-grade corporate bond yields and government bond yields globally has fallen to its lowest level since April 2022, according to a Bloomberg index. This gap has narrowed over the past month, as investors stepped up buying corporate bonds amid rising optimism about a soft landing for the US economy.

Also according to Bloomberg data, the average yield on investment-grade corporate bonds fell to 5.3% this week, after rising to about 6% in October – the highest level since 2009. .

However, there are still warnings that one should not bet too much on the possibility of the Fed sharply cutting interest rates in 2024, because such a rate cut will require a hard landing of the economy. American economy. The interest rate swap market is reflecting the expectation that the Fed will cut interest rates by 1 percentage point in 2024. Meanwhile, in the forecast released in September, Fed officials only expected to cut interest rates by half a point. percent next year. This forecast will be updated by the Fed during the final monetary policy meeting of 2023 scheduled to take place on December 12-13.

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