The yield on the US 10-year Treasury note, seen as a proxy for global borrowing costs, topped 3.7%, a level not seen in more than a month, as investors adjust their portfolios for a higher terminal rate. Richmond Federal Reserve president Thomas Barkin was among the latest officials to acknowledge that the US economy is slowing but warning that it is fundamental to continue hiking to ensure inflation doesn't get entrenched. Investors now see the Fed raising the fed funds rate to 5%-5.25%, with the world's most influential central bank delivering a 25 bps hike in March and May before pausing. Looking ahead, Wall Street and the Fed are again in a standoff on the future path of interest rates, with the former betting on a rate cut later this year while the latter reaffirmed its view that interest rates will stay higher for longer.
The yield on the UK’s 10-year Gilt held slightly above 3.3% after touching 2.996% on February 2nd, its lowest level since November 24th, as investors digested Britain's fourth-quarter GDP data. The UK economy flatlined in the fourth quarter of 2022, in line with expectations and narrowly avoiding a recession. However, monthly GDP data for December alone, a month marked by widespread rail strikes and bad weather, showed that the economy shrank 0.5%, more than the 0.3% expected by markets. The Bank of England has raised interest rates by 50bps at the beginning of the month but dropped its pledge to keep increasing them "forcefully" if needed and said inflation had probably peaked, while projecting a much shallower contraction than previously estimated.
The yield on the Japan 10-year JGB consolidated at the Bank of Japan's implicit policy cap of 0.50% as investors assessed whether the institution would maintain its ultra-easy monetary stance when the new governor takes a seat in April. Kazuo Ueda, a well-respected economist is set to take a governor's job after current Deputy Governor Masayoshi Amamiya, the most dovish candidate, declined it. Markets welcomed Ueda's name as he is expected to adopt a more hawkish approach. The BOJ has been spending trillions of yen to preserve the ceiling on the 10-year bond as part of efforts to keep borrowing costs low and stimulate the economy.
Germany's 10-year government bond yield rose above 2.37% on Friday, moving closer to Wednesday's over one-month high of 2.396% and heading towards its biggest weekly rise in 2023, as investors digested hawkish remarks by European Central Bank officials early this week. ECB's Joachim Nagel joined a chorus of policymakers calling for more interest rate increases, saying the ECB must act decisively to prevent inflation expectations from rising far above its 2% target, while board member Isabel Schnabel said that the rate hikes delivered by the ECB so far were having little impact on inflation. The ECB has raised its key rates by 50bps to the highest level since 2008, and signaled another similar hike in March to extend its efforts against soaring inflation in the bloc. Meanwhile, Germany's latest CPI report showed Thursday inflation in Europe's largest economy picked up slightly to 8.7% in January but remained below market forecasts of 8.9%.
Market participants had mostly bet on a final borrowing costs hike in the current tightening cycle. The central bank also kept its stance unchanged on the withdrawal of accommodation and said it would allow banks to borrow and lend government bonds to increase liquidity in the market. Early in the month, the government presented its Union Budget for the 2023-24 financial year, setting borrowing at INR 15.43 trillion, below broad estimates of INR 16 trillion.
The yield on China's 10-year government bond fell back to 2.9% in February after approaching 3% in late January as traders monitored the country's reopening. China lifted its borders, moved away from the strict zero-COVID policy, and took measures to support the property sector late last year. The economy is expected to rebound in 2023, although a big boost has yet to materialize. The IMF revised China's growth outlook sharply higher for 2023, to 5.2% from 4.4% in October. Meanwhile, foreigners sold roughly CNY 616 billion worth of bonds in 2022, taking their holdings down to CNY 3.4 trillion, with the trend strengthening this year, according to Reuters. Some foreign investors are preparing for monetary tightening, while others see more RRR cuts from the PBOC in 2023.
France's 10-year government bond yield rose back above 2.8%, moving closer towards Wednesday's over one-month high of 2.859%, as hawkish remarks by several European Central Bank policymakers dashed hopes of a quick end of the monetary tightening cycle. ECB's Joachim Nagel reaffirmed his call for more interest rate increases, saying the bloc's central bank must act decisively to prevent inflation expectations from rising far above its 2% target, while board member Isabel Schnabel said earlier in the week that the rate hikes delivered by the bank so far were having little impact on inflation. The ECB has raised interest rates by 50bps at its February meeting, pushing up borrowing costs to the highest level since late 2008, while markets have priced in 100 bps of further rate hikes, implying a deposit rate above 3.5% by August 2023. On the data front, France's inflation rate picked up slightly to 6% in January, remaining close to a four-decade high of 6.2% seen in October and November.