Demand for bonds is soaring amid rate-cut speculation

by Ruth Carson and Matthew Burgess

Global bonds rallied Tuesday, echoing overnight gains in US Treasuries, as bets for an early Federal Reserve interest-rate cut bolstered the appeal of sovereign debt.

Yields on Australian and New Zealand 10-year bonds fell at least eight basis points after data showed US factory activity shrank in May at a faster pace as output came close to stagnating. Yields on Japan’s 10-year notes retreated two basis points ahead of a ¥2.6 trillion ($16.6 billion) debt auction later Tuesday. Elsewhere, South Korean securities also advanced. 

The renewed optimism in bonds may be tested in the coming days as a raft of employment figures shed light on whether the US jobs market is cooling sufficiently to warrant policy easing. Traders’ previous bets for Fed rate cuts proved to be premature after Chair Jerome Powell stressed the need for more evidence that inflation is on a sustained path to the 2% goal before reducing borrowing costs. 

Rate decisions by the Bank of Canada and European Central Bank will also be on traders’ radar. 

“Investors seem to be happy to scale in as cuts get closer and closer,” said Robert Thompson, macro rates strategist at RBC Capital Markets in Sydney. “Not just from the Fed though — this week of course is about the BOC and ECB, both of which we and markets expect to kick off cutting cycles.”

Treasury 10-year yields edged up two basis points to 4.41% on Tuesday after sliding 11 basis points on Monday. Upcoming US jobs opening data due Tuesday may also fuel renewed demand for bonds if the numbers trail economists’ expectations. 

“Levels had gotten cheap last week,” said Martin Whetton, head of markets strategy at Westpac Banking Corp. “Lately it has been a challenge to string two consecutive days of gains for fixed-income markets together but we’ve just had them.”

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