Bond prices fall as yields rise everywhere except Japan. Global inflation pressure picking up. Easier fiscal policies contemplated

By Jason Wong

It’s been a quiet end to the month for the bond market, with slightly lower rates across the board.

Bond investors will be glad to see the back of the October, with the Barclays Global Aggregate index showing a 3% fall for the month, performing worse than global equities, which only show a small fall.

For the month, the increases in 10-year government bond rates have been 25 bps for the US, 28 bps for Germany, 50bps for the UK and 44bps for both Australia and NZ.  The BoJ’s “yield curve control” policy has meant only a rise of 4bps for Japan’s 10-year government bond.

Doing the damage to the bond market was (1) a growing sense that global central bank policy is nearing a turning point (the Fed back in a hiking mood, while QE policy in Europe and Japan on the verge of winding down), (2) global inflation pressures picking up (witness the rise in China’s PPI inflation and rising commodity prices), and (3) an expectation that easier fiscal policy might emerge to support economies.

For the final trading day itself, the US 10-year rate is down 1 bp to 1.84% and has traded in a tight 3bp range, while the 2-year rate is steady on 0.85%.  Germany’s 10-year rate was down by less than 1 bp to 0.16%. Euro-area headline CPI inflation rose to a 2-year high of 0.5%, while core inflation fell to a 6-month low of 0.8%.

NZ’s yield curve showed modest reductions in rates, with the 2-year swap and 10-year swap rates both down 1.5 bps to 2.135% and 2.83% respectively. The ANZ NZ business outlook survey, showing a fall in activity indicators from September highs and flat inflation expectations, came and went without any fanfare.

Today’s RBA meeting is expected to offer no hints of further easing at this juncture and there is likely to be more interest in the running of the Melbourne Cup than the policy statement.

Today we’ll be watching the China PMIs, although they aren’t expected to show much change from the previous month.  Overnight sees the release of the ISM manufacturing indicator, which is expected to show a small increase.  The more volatile Chicago PMI was released overnight showing an unexpectedly large fall.  The ISM would have to show a shockingly large fall to change expectations for a December Fed rate hike.