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Global bonds rally after BoE leaves investors ‘wrongfooted’

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There was a strong rally in global bond markets on Thursday after the Bank of England held interest rates at record lows, surprising investors who had spent the past few weeks positioning for a shift towards tighter monetary policy from big central banks.

The move came the day after the Federal Reserve confirmed its long-telegraphed intention to shrink its $120bn-a-month bond purchases by $15bn a month but took a patient stance on future rate rises.

The BoE confounded market expectations of a rate rise, which had ratcheted up following a series of hawkish public statements from policymakers. Governor Andrew Bailey said last month that the central bank would “have to act” if inflation proved stubbornly high. UK government debt rallied sharply, erasing part of its heavy losses over recent weeks, while the pound tumbled 1.4 per cent against the dollar to $1.34.

Ten-year UK gilt yields sank by 0.14 of a percentage point to 0.93 per cent, reflecting higher prices. Short-dated government debt notched up even bigger gains, with two-year yields falling 0.21 of a percentage point to 0.46 per cent, as investors reined in their expectations for a steep rise in interest rates over the coming year.

“This is a market that’s been wrongfooted,” Mike Riddell, a portfolio manager at Allianz Global Investors. “These moves are pretty huge.”

The rally spread to other big bond markets, with the US 10-year Treasury yield falling 0.08 of a percentage point to 1.52 per cent, and the US two-year recording its biggest one-day rally since March 2020, with the yield last down 0.05 of a percentage point to 0.41 per cent.

In the eurozone, German two-year yields sank to a six week-low of minus 0.73 per cent.

The moves continued a pattern that has seen global bond markets buffeted in recent weeks by reassessments of monetary policy in a series of smaller economies, including the UK, Australia, and Canada.

“There’s no question the US rates market is reacting to the Bank of England,” said Andy Brenner, head of international fixed income at NatAlliance. “It drew people who were bearish globally to cover their shorts. The Bank of England was expected to raise rates and Powell may have spooked the BoE.”

In equity markets, Wall Street and European stocks closed at fresh all-time highs, continuing their move higher in the wake of Wednesday’s Fed meeting.

The benchmark S&P 500 closed up 0.4 per cent, the sixth consecutive record close. The technology-focused Nasdaq Composite closed up 0.8 per cent, also its sixth consecutive closing high.

The Fed’s tapering announcement had been interpreted by financial markets as “a sign things are going well” in the US economy, said Tatjana Greil Castro, co-head of public markets at credit investor Muzinich & Co.

“We now expect interest rate rises at the end of the second quarter of next year or the start of the third quarter,” she added, with the Fed likely to “normalise monetary policy in a way that gives them the opportunity to ease again when they need to”.

Some analysts remain concerned that the Fed may respond too slowly to inflation, which is running at more than 5 per cent in the US because of pandemic-related factors that have disrupted supplies of goods and kept workers out of the job market.

“If the Fed ends up behind the curve, then they could end up raising rates very quickly and in big amounts,” said Paul Jackson, head of asset allocation research at Invesco.

In Europe, the regional Stoxx 600 index closed up 0.4 per cent.

The dollar index, which measures the US currency against six others, rose 0.5 per cent.

In Asia, Tokyo’s Topix share index added 1.2 per cent while mainland China’s CSI 300 rose 1 per cent, with all other main equity gauges in the region trading higher.

Brent crude, the oil benchmark, settled down 1.77 per cent at $80.54 a barrel.

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