European bonds led a global debt rally, extending a strong start to 2023 amid signs that inflation is starting to slow.
(Bloomberg) — European bonds led a global debt rally, extending a strong start to 2023 amid signs that inflation is starting to slow.
The 10-year German benchmark gained for a third day, its longest rising streak since November. Italian debt outperformed, taking its yield gap over Germany, a common gauge of risk in the euro region, to the narrowest in three weeks. US Treasuries also rose, led by the belly of the curve.
The moves reflect growing confidence that last year’s sharp interest rate hikes have started to tame soaring inflation, which devastated bond returns globally last year. That’s prompted investors to pounce on yields still lingering at multi-year highs, especially as slowing economic growth emerges as another tailwind for sovereign debt.
“Greater signs of disinflation and the threat of inflation receding is exactly what bond investors need to see,” Schroders Asset Management analysts including Paul Grainger, head of global fixed income and currency, wrote in a note.
Indicators such as global shipping costs and economic surveys “have been pointing to this dynamic for a while,” they added. “We are now finally beginning to see it reflected in official inflation measures.”
Read More: French Inflation Unexpectedly Slows, Easing Pressure on ECB
Data earlier Wednesday showed that French inflation slowed in December, just a day after a similar report in Germany. Figures on Friday for the entire euro area are expected to show another slowdown to 9.5% from 10.1% previously.
US Treasuries gained, as investors awaited the minutes from the Federal Reserve’s last meeting, when officials reduced the pace of hikes from 75 to 50 basis points. The 10-year yield fell 6 basis points to 3.68%.
Still, strategists warn that European Central Bank officials are likely to keep emphasizing the need for further hikes. Governing Council member Martins Kazaks expects interest rates to be raised “significantly” in February and March, he said on Tuesday, noting the need to lower inflation towards the 2% target.
That could disrupt the “remarkable rally” seen so far this year, said Piet Christiansen, chief strategist at Danske Bank A/S. The 10-year German yield has fallen 30 basis points to 2.27% since the end of 2022.
“With core inflation showing no signs of budging in the December data, the ECB is likely to remind markets that they see significant tightening in the period ahead,” Christiansen said.
–With assistance from James Hirai.
(Updates bond prices, adds analyst comment.)
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