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US Treasuries rallied on Tuesday as investors rushed to haven assets following Hamas’s attacks in Israel and comments from Federal Reserve officials who hinted that the US may have reached the end of its rate-rising campaign.
The yield on benchmark 10-year Treasuries dropped 0.18 percentage points to 4.62 per cent on its reopening after a US public holiday, before nudging higher to 4.70 per cent. Yields fall as prices rise.
“There has been a flight to safety as conflict unfolds in the Middle East,” said Andres Sanchez Balcazar, head of global bonds at Pictet. “It’s quite natural that an exogenous shock like this will generate a rally in US Treasuries.”
The rebound in prices comes after relentless pressure on global sovereign debt markets in recent weeks as investors responded to the Fed’s message that interest rates will stay higher for longer. Benchmark US debt yields hit a 16-year high of 4.88 per cent on Friday following stronger than expected jobs data.
It also followed moves on European debt markets on Monday, when German Bund yields — a benchmark for the eurozone — fell 0.11 percentage points, before nudging 0.05 percentage points higher on Tuesday to 2.82 per cent.
US government was also boosted by comments on Monday from Fed officials, who signalled that the central bank may have finished raising interest rates.
Lorie Logan, Dallas Fed president and a notable hawk, said the sharp rise in long-term yields in October could mean less need for further rate increases.
“It seems increasingly likely that the hike from the Fed in July will prove to be the last, although if US growth fails to weaken in the coming months then another hike is definitely not off the table,” said Mike Riddell, a bond fund manager at Allianz Global Investors.
Futures markets now indicate a 12 per cent probability of an interest rate rise at the Fed’s November meeting, down from 30 per cent after Friday’s payroll data.
The retreat of expectations for further rate rises comes as the IMF on Tuesday urged regulators to sharpen their scrutiny of threats from rising bond yields, with a continuing surge in global borrowing costs triggering “heightened risk” in financial markets.
The rally in Treasuries boosted stock markets, which have fallen sharply as rising bond yields dim the relative appeal of equities. The Stoxx 600 Europe index rose 1.6 per cent on Tuesday.
On Wall Street, the S&P 500 index opened 0.2 per cent higher.
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