UK and Europe's Borrowing Costs Slide as Central Banks Hold Rates

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ICARO Media Group
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02/11/2023 21h44

UK government borrowing costs have fallen sharply, continuing a pull-back from recent highs, after the Bank of England decided to keep interest rates steady for a second consecutive month. This move aligns with a perceived "dovish surprise" by the Federal Reserve, which has pushed government bond yields lower worldwide. Bond prices rallied as investors seemed to disregard comments from central bank heads regarding further rate hikes and the long road ahead to reach inflation targets.

The 10-year yield on UK government bonds, known as gilts, decreased by 13 basis points to 4.366% at 3:20 p.m. in London following the Bank of England's announcement at midday. Additionally, the 2-year yield, which reflects interest rate expectations, dropped by 8 basis points to 4.711%.

The trend of sliding borrowing costs is not limited to the UK. In Europe, German 10-year bond yields fell by approximately 5 basis points after the Federal Reserve's decision, while Italy's 10-year yield declined by 9 basis points. Last week, the European Central Bank also decided to keep rates steady. Despite risks from the credit market and a contraction in the economy during the third quarter, ECB chief economist Philip Lane expressed optimism, stating that there was a "good chance" the euro zone would avoid a recession.

Analysts suggest that global markets are closely watching the actions of the Federal Reserve. The "more-dovish-than-expected tilt" by Fed Chair Jerome Powell during the FOMC press conference was identified as a key reason behind the falling yields. Steve Englander, head of global G10 FX Research and North America macro strategy at Standard Chartered, mentioned that the market did not shift to risk-on until Powell indicated that the risks of over-tightening versus under-tightening were better balanced.

Furthermore, U.S. Treasury yields, which reached 16-year highs in October, experienced a significant decrease on Thursday as investors continued to digest the Federal Reserve's comments. Englander also noted that bond yields were reacting to the U.S. Treasury's unexpectedly moderate refunding projections and weaker-than-forecast U.S. manufacturing data.

As borrowing costs declined, equities received a boost. Europe's Stoxx 600 index climbed by 1.8%, while U.S. stock markets opened higher as risk-on appetite returned.

Overall, the decision by the Bank of England to hold rates steady, coupled with the Federal Reserve's perceived dovishness, has led to a slide in borrowing costs in the UK and Europe. Investors appeared to disregard concerns about further rate hikes and inflation targets, resulting in a rally in bond prices. As market participants continue to focus on the actions of the Federal Reserve, yields are expected to remain under pressure while equities benefit from the improved risk sentiment.

Please note that the information and numbers in this article are fictional and do not represent actual market data.

The views expressed in this article do not reflect the opinion of ICARO, or any of its affiliates.

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