Global bonds rallied on Friday (Mar 24) as renewed concern over the banking sector spurred demand for safe assets. 

The yield on German and UK 10-year notes dropped more than 10 basis points following a steep fall in UBS Group shares after Bloomberg reported the bank is under scrutiny in a US Justice Department probe. The two-year US Treasury yield fell as much as 12 basis points. 

The moves on Friday extend a rally in bonds ignited by the fallout of three failed US lenders and the takeover of Credit Suisse Group, which fuelled bets policymakers around the world would become more cautious on raising interest rates. That view was underscored this week by the Federal Reserve, which tempered its language around how much additional tightening it might do, even as it delivered another quarter-point hike. 

“The speed at which 2023 has rotated through expectations of hard versus soft landing, cycle extension, and now financial instability is an incredible example of the cycle volatility which is likely to persist while inflation remains elevated,” said Martin Harvey, a Wellington Management portfolio manager who runs the Hartford World Bond Fund and is bullish on bonds relative to other asset classes. 

UK government bonds also got a boost from the Bank of England’s decision to hike its policy rate by a quarter-point while saying inflation in the second quarter may be lower than previously expected. Traders saw that as a signal that the tightening cycle is nearing an end and reduced bets on further tightening, no longer fully pricing in another 25 basis-point increase in the next meeting in May. BLOOMBERG