Global bond markets rally on Fed outlook

Global bond markets rally on Fed outlook

By Michael Mackenzie in New York and David Turner in Tokyo

Published: October 26 2006 18:29 | Last updated: October 26 2006 21:45

Global bond markets rallied as investors on Thursday cheered the Federal Reserve’s less strident tone on inflation and prepared for weaker US growth data on Friday.

The US central bank failed to deliver the kind of tough statement investors were fearing when it held interest rates steady on Wednesday. That sparked a relief rally in bonds that continued on Thursday as investors focused on third quarter gross domestic product data, due on Friday. Bullish sentiment also helped absorb the sale of new five-year Treasury notes.

“The market is trading expectations of weaker growth and the whisper number for third quarter growth is about 1.5 per cent,” said Richard Gilhooly, senior fixed income strategist at BNP Paribas. The consensus estimate among economists is about 2.2 per cent.

“The Fed’s statement suggests we saw more of a dip in growth for the quarter than some expected.”

The 10-year US Treasury was yielding 4.725 per cent, down 4.4 basis points. US data showing orders for all durables excluding transportation goods rose just 0.1 per cent in September helped push up bond prices.

New homes sales surprisingly rose for a second month although investors were more focused on the sharp fall in house prices over the past year.

In Europe, bond prices were higher and yields lower as the Fed statement was digested. The 10-year bund yield fell 1bp to 3.85 per cent and the 10-year gilt yielded 4.66 per cent, down 4bp.

Jean-Claude Trichet, European Central Bank president, said the bank expected inflation would stay high this year and during 2007.

Japanese government bonds rallied in response to overnight strength in US Treasuries and short-covering ahead of Friday’s Japanese consumer price figures. The 10-year yield dropped 5bp to 1.750 per cent.

Consumer price deflation ended last year but core inflation has made slow progress in Japan, up to only 0.3 per cent in August.

Shorter-dated bonds were supported by an auction of Y1,700bn in two-years, with demand four times higher than supply. The yield on the benchmark two-year fell 0.3bp to 0.755 per cent.