Global bond rally intensifies amid rate cut bets

investmentnews.com:

Bonds rallied and equities paused as a fresh batch of soft inflation data boosted the likelihood of interest-rate cuts, but also underscored the risk of an economic downturn.

Germany’s 10-year yield dropped below 2% for the first time in nine months after a report showed producer prices fell more than expected in November. Meanwhile, British 10-year borrowing costs retreated as much as 11 basis points as slower-than-expected inflation boosted the case for Bank of England rate cuts next year. Treasury yields slid 5 basis points to 3.9%, down more than 40 basis points this month.

The UK data “adds to the mounting evidence that global inflation has begun to crumble on a broader basis,” said Christoph Rieger, head of rates research at Commerzbank. 

The data initially lifted regional stock markets, but gains on the Stoxx 600 index quickly evaporated. US equity futures also eased, with contracts on the Nasdaq 100 shedding 0.3%. London’s export-oriented FTSE 100 benchmark held its gain, however, as the pound tumbled 0.5%. 

Policy-easing bets have gathered momentum across the developed world since the US Federal Reserve’s recent dovish pivot. Economic data has backed that view, especially in the euro area, where analysts surveyed by Bloomberg forecast the first recession since the pandemic. Inflation has slowed to 2.4% in November, from a peak above 10% last year,

Money markets have moved to price almost a 50% chance of an euro-area rate cut by next March, while seeing an even higher probability of a Fed cut that month. 

Investors have paid little heed to policymakers’ efforts to push back against the exuberance. Instead, they have seized on comments made Tuesday by Richmond Fed President Thomas Barkin, who suggested the U.S.