(Bloomberg) -- US bonds climbed after a senior White House official said there are signs Iran is preparing to imminently attack Israel, boosting demand for safe haven assets around the world.
The advance in Treasuries on Tuesday sent yields tumbling some seven basis points across all maturities to touch the day’s lows. Trading volumes in 10-year Treasury note futures skyrocketed, while bonds across Europe and the dollar extended gains. Riskier assets including stocks sank.
“The conflict in the Middle East could escalate further,” said Valentin Marinov, head of G10 FX strategy at Credit Agricole SA. “Depending on how significant any escalation is, the impact on the markets would likely go through the channel of risk sentiment,” spurring demand for safe havens, he said.
Treasuries and the dollar held onto their gains after US data showed an unexpected rise in job openings for August, while ISM manufacturing and its employment component was weaker than forecast. Traders are still toying with the prospect of a second half-point cut from the Federal Reserve, looking to data on the labor market for clues.
Money markets imply a roughly one-in-three chance the Fed will deliver another half-point cut in November, and are pricing a total of about 190 basis points of easing by the end of next year.
Still, BlackRock Inc. Chief Executive Officer Larry Fink said the market is pricing too many interest-rate cuts from the Fed given the US economy continues to grow, adding that most government policies at the moment are more inflationary than deflationary.
Fed Chair Jerome Powell Monday said the central bank will lower interest rates “over time,” while again emphasizing that the overall US economy remains on solid footing.
Tom di Galoma, head of fixed income at Curvature Securities said “the overriding factor for the Treasury market is the geopolitical news out of the Mideast, with the White House announcing Iran is ready to attack Israel.” He said French and German bonds “are making new gains,” with the “US market playing catchup.”
Global Bond Gains
Global government bonds had been rising early on Tuesday, even before investors ramped up demand for safety, as traders in Europe positioned for swifter interest-rate cuts amid signs the region’s economy is in need of looser monetary policy.
The yield on French 10-year bonds fell as much as 14 basis points to 2.78%. The equivalent German rate fell eleven basis points to 2.01%, the lowest level since January. The euro slipped as much as 0.7% to $1.1059.
European Central Bank’s Olli Rehn hinted the bank would consider cutting interest rates again when it sets policy this month. He was the latest policymaker to raise the possibility of back-to-back reductions. President Christine Lagarde indicated Monday the ECB is becoming more optimistic that it will be able to get inflation under control.
“The notion that an inflation-concerned ECB would move more carefully than the Fed on easing is crumbling,” said Francesco Pesole, currency strategist at ING Bank NV.
Rates traders are quickly coming around to the idea that the global easing cycle may be bolder than previously expected, and are bidding up bonds before interest rates fall further. Data Tuesday showed euro-area inflation eased below the ECB’s 2% target for the first time since 2021 in September, the latest sign that activity is cooling and price pressures that dogged economies for years are now firmly back under control. Meanwhile, concerns about Germany are on the rise.
The outlook for the manufacturing sector in the euro-area’s biggest economy is particularly dire and the government in Berlin is set to lower its economic-growth forecast for this year, expecting stagnation at best following a full-year contraction in 2023.
A quarter-point ECB cut in October — a fringe risk just weeks ago — is now almost fully priced. Against this backdrop, a host of banks have recently revised their forecasts. JPMorgan Chase & Co., Goldman Sachs Group Inc. and Barclays Plc all see the ECB cutting rates in October, compared to December previously.
--With assistance from Anna Edwards and Greg Ritchie.
(Recasts with geopolitical news, US bond moves and haven demand throughout.)
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