The yield on the US 10-year Treasury note eased below 4.45% after topping 4.5% for the first time since 2007 on Thursday, as softness in the services sector put a halt to this week’s bond selloff. New PMIs suggested that tighter policy is being transmitted to a greater extent for service providers, supporting demand for policy-sensitive assets. Still, the yield on the 10-year note is set to close the week 12bps higher. Earlier data showed that both consumer and producer prices rose above expectations to pare hopes of disinflation, while unemployment claims unexpectedly sank to an over seven-month low. These developments aligned with hawkish bets from the Fed’s SEP, as policymakers held the terminal rate forecasts at 5.75% and trimmed the extent of rate cuts next year. Accordingly, members revised GDP growth expectations higher to 2.1% this year and 1.5% next year, while the unemployment rate for 2024 was revised lower to 4.1%.
The yield on the benchmark German 10-year Bund eased to 2.73%, down from a 12-year peak of 2.779% reached on September 21st, as investors held out hope that the latest PMI surveys might prompt European Central Bank hawks to moderate their policy stance. The data indicated that the Eurozone private sector continued to contract at a steep pace in September, with inflows of new orders declining the most since November 2020. In Germany, manufacturing production led the overall contraction in output, falling the most since May 2020. Meanwhile, a group of European Central Bank policymakers has expressed concerns about the possibility of another rate hike. Last week, the bloc's central bank implemented its 10th consecutive rate increase and suggested that it is likely finished with tightening its policy.
The yield on the UK's 10-year Gilt retreated back below the 4.3% threshold, approaching the two-month low of 4.213% reached on September 20th, as PMI data indicating a significant contraction in private sector activity raised the possibility of Bank of England hawks moderating their policy stance. The most recent survey revealed that UK business activity declined the most in over two-and-a-half years in September, driven by sharp decreases in both manufacturing and services output. On the policy front, the Bank of England maintained its interest rates at the September meeting but signaled its commitment to keeping interest rates elevated for an extended period. With signs of slowing inflation and a loosening labor market, UK policymakers are expected to maintain the Bank Rate at 5.25% in November.
The yield on Italy's 10-year BTP climbed back above the 4.5% threshold, moving closer to a recent six-month peak, prompted by the US Federal Reserve's indication of a prolonged period of higher interest rates. In contrast, investors appear to assign a 90% likelihood to borrowing costs in the Euro Area remaining steady at the central bank's forthcoming meeting, with only a 10% chance of them rising to 4.25%, despite a few hawkish remarks made by European Central Bank officials earlier this week.
The French 10-year OAT yield reached the 3.3% threshold, a level not seen since January 2012 In Europe, the European Central Bank is expected to put a pause on rate hikes at its upcoming October meeting after a string of ten consecutive increases to multi-year highs. In economic data news, French business sentiment improved in September, exceeding market expectations.
