Bond Watch: has the big bond rally finally begun?

Welcome to interactive investor’s ‘Bond Watch’ series, covering the latest market and economic news – as well as analysis – that is relevant to bond investors.  

Our goal is to make the notoriously complicated world of bond investing simpler, by analysing the week’s most important news and distilling it into a short, useful and accessible article for DIY investors.  

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Here’s what you need to know this week. 

Prices up, yields down

After a series of false dawns for fixed-income investors, bonds finally look like they are going to hold on to their price gains, as a market consensus forms that interest rates have peaked and the economy is slowing down.

Over the past month, the yield on the 10-year gilt has fallen from around 5% to 4.5%, while the US 10-year bond has dropped from 4.6% to 4.2%.

The rally came as the Bank of England and US Federal Reserve opted to hold interest rates for the second consecutive month, and indicated that they have likely finished their rate hike cycles.

Invesco, the fund group, says that recent data reports from the US, Europe, and Canada show that inflation has been slowing and it appears markets are finally getting the memo that central banks are very likely done hiking rates.

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Kristina Hooper, chief global market strategist at the firm, said: “The 10-year US Treasury yield eased significantly the week ending 3 November, starting with the underwhelming ISM Manufacturing PMI, then the dovish Federal Reserve meeting, and then the tepid jobs report. Other long bond yields also followed this trend, from 10-year UK gilt yields to 10-year German bund yields.”

Hooper says that it means it is highly unlikely that we will see any more rate hikes from Western developed central banks – and we could see rate cuts coming soon.

One risk to deflation, Hooper says, is that higher oil prices could slow the deflation train.

She adds: “Yes, there are risks to the view that disinflation will continue — specifically higher crude oil prices. However, higher oil prices have taken time to seep into core inflation. In the meantime, they can reduce spending power and, thereby, tamp down consumer demand, helping do some of the Federal Reserve’s work for it. And luckily, we have actually seen oil prices in retreat in recent days.”

UK economy flatlines

The UK economy stalled between July and September, new estimates from the Office for National Statistics (ONS) showed, as interest rates rises hit household and business confidence.

Gross domestic product (GDP) grew 0% in the third quarter of the year, following a 0.2% increase between April and June.

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The ONS said that there was a fall in business investment, household spending and government consumption in the period, and a rise in the volume of international trade flows.

There was a fall of 0.4% in real household expenditure in the three months, following an increase of 0.5% in the previous quarter, as households felt the squeeze for higher debt costs and high prices.

The latest data shows that the UK economy is slowing and interest rate rises are having their desired effect, justifying the Bank of England’s decision to hold rates steady at 5.25% for two months in a row.