Investing

European Bonds Rally Before Officials Including BOE’s Pill Speak

(Bloomberg)

(Bloomberg) -- Bonds in Europe rallied ahead of closely-watched remarks by Bank of England policymakers and further testimony by Federal Reserve Chairman Jerome Powell.

The gains were broad based and followed a rebound in Treasuries spurred by healthy demand in auctions late Tuesday. Risk-sensitive Italian debt led the charge, with the 10-year yield falling as much as 10 basis points, the most in almost four weeks. The equivalent UK yield fell to a two-week low of 4.09%.

BOE chief economist Huw Pill later Wednesday is due discuss the UK economic outlook, in one of the first appearances by an official since a communications blackout was lifted after the general election last week. He will be followed by Catherine Mann, who is know for her hawkish leanings.

Last month’s decision not to cut rates was finely balanced and investors will be parsing their remarks for any signs they’re moving closer on delivering their first interest-rate cut this cycle. The chance of a quarter-point cut in August stands at roughly 60%, money-market pricing shows. 

European sovereign debt markets have been rangebound for months after central banks from the Federal Reserve to the European Central Bank pushed back on the idea that rate cuts will come hard and fast. While that’s limited outright gains, it has provided a fertile backdrop for carry trades, a strategy that involves collecting coupon payments on higher-yielding assets.

“Evidence points to investors initiating carry trades,” said Evelyne Gomez-Liechti, a strategist at Mizuho International Plc.

Powell testifies to the House Financial Services Committee later, providing another opportunity to discuss the outlook for rate cuts, having been careful not to offer a timeline in commentary on Tuesday. 

German 10-year yields fell six basis points to 2.52%, while their US peers were two basis points lower at 4.27%, leaving them unchanged since Friday. 

--With assistance from Greg Ritchie.

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