Government Bonds

In a week when US core consumer price inflation unexpectedly rose to 0.4% month-on-month and Federal Reserve (Fed) chair Jerome Powell told Congress the central bank was in “no hurry” to cut interest rates, many market participants have been surprised by the relatively muted reaction in US Treasuries (USTs).

The relationship between government bond yields and swap rates – otherwise known as the swap spread – has been increasingly in focus, with the market’s attention turning to Europe last week as the 10-year German Bund yield traded higher than the 10-year euro swap rate for the first time ever.

Market attention in the government bond market has rapidly turned from central banks holding rates “higher for longer” to the potential for “lower and sooner".

There is little disagreement among investors and economists that the last few years have been highly unusual in many respects. An inflationary shock in developed markets, one of the fastest rate hiking cycles on record, the worst year in decades for government bonds (2022), and mild recessions with no movement in unemployment are just a few of the dynamics that have strayed from recent norms.

Felipe Villarroel takes a look at how inverted government bond curves are at the moment and how previous episodes of normalisation have unwound, as curves normalised, exploring the possibilities of how the unwinding process could happen and how long it could take.

With 2023’s rally halted by the Fed’s hawkish messaging, Felipe Villarroel questions whether markets read the recent jobs data correctly and looks at what it means for terminal rate expectations.

With many market participants fearing the impact of quantitative tightening (QT), Johnathan Owen looks at one central bank’s early experience of actively selling bonds to investors.

Recent employment data suggests the US economy may escape with a soft landing, a welcome boost to market sentiment in the early days of 2023, says Eoin Walsh.

In our annual ‘Rodney Blog’, Eoin Walsh says that with rates now offering both yield and downside mitigation, and credit yields at near-decade highs, fixed income investors could enjoy strong returns in 2023

With a US inflation print finally coming in below expectations, can investors start to picture decent returns again? Or will this latest relief rally prove another false dawn?

With Rishi Sunak and Jeremy Hunt leading a more fiscally conservative UK government, Johnathan Owen checks in on sterling asset valuations and argues the UK premium is overcompensating for underlying risks.

While central banks remain committed to battling inflation with big rate hikes, George Curtis detects a clear change in tone which has seen market expectations of terminal rates tumble in recent days.