Bonds: Great expectations – HSBC

Yields in the UK were pushed higher in September with the 10Y up 30bp on the month, notes the analysis team at HSBC and was partly in response to stronger inflation and employment data.

Key Quotes

“The key event, however, was the Bank of England meeting on 14 September. Rates were left on hold but the distinctly hawkish rhetoric was not ignored by markets; a 25bp rate hike at the November 2017 meeting was 67% priced in by the end of the day. On 22 September, Moody’s downgraded the UK to Aa2 but the reaction in the gilt market was limited. However with the expectation of an upcoming hike, gilt yields continued to climb, with the 10Y ending the month at 1.37%.”

“In the US, the market also focussed on signals from the central bank. At the 20 September meeting the Federal Reserve communicated future higher rates, indicating a December rate hike is likely, in addition to further hikes in 2018. They also formally announced the shrinking of their USD4.5trn balance sheet in October. The 2Y note yield rose around 6bps following this, but it was Yellen’s warning against moving too slowly to tighten monetary policy on 26 September that brought the 2Y note yield to its highest level since 2008 as it hit 1.49%.”

“Portugal’s credit rating was upgraded from junk by S&P on 18 September, having been below Investment Grade since 2011. Portuguese government bonds rallied, with the 10Y yield falling to its lowest level since December 2015 on 20 September, at 2.36%.”