Global bonds extend New Year rally on signs inflation has peaked

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. Treasuries also rose. 

The moves reflect growing confidence that 2022’s sharp interest rate hikes have started to tame record inflation, which devastated bond returns globally last year. That’s prompted investors to pounce on yields still lingering at multi-year highs, particularly with slowing growth seen 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.”

Data earlier on Wednesday (Jan 4) 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 per cent from 10.1 per cent previously.

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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 4 basis points to 3.70 per cent. BLOOMBERG