Market Commentary

Global bonds rally after BoE goes against market expectations

• There was a strong rally in global bond markets on Thursday after the Bank of England (BoE) held interest rates at record lows, surprising investors who had spent the past few weeks positioning for a shift towards tighter monetary policy from big central banks. The move came the day after the Federal Reserve confirmed its long-telegraphed intention to shrink its US$120 billion-a-month bond purchases by $15 billion a month but took a patient stance on future rate rises.

• The BoE confounded market expectations of a rate rise, which had ratcheted up following a series of hawkish public statements from policymakers. Governor Andrew Bailey said last month that the central bank would “have to act” if inflation proved stubbornly high. UK government debt rallied sharply, erasing part of its heavy losses over recent weeks, while the Pound fell against the US Dollar. The moves in UK gilt yields to reflect higher prices, as investors reined in their expectations for a steep rise in interest rates over the coming year, indicated a market caught wrong footed.

• The rally spread to other big bond markets, with the US 10-year Treasury yield falling to 1.52%, and the US two-year recording its biggest one-day rally since March 2020, with the yield last down to 0.41%. In equity markets, Wall Street and European stocks closed at fresh all-time highs, continuing their move higher in the wake of Wednesday’s Fed meeting.

• The benchmark S&P 500 closed up 0.4%, the sixth consecutive record close. The technology-focused Nasdaq Composite closed up 0.8%, also its sixth consecutive closing high. Tech companies tend to be fast-growing, expecting a bulk of their profits many years into the future, so they see a particularly powerful boost to their valuations when bond yields are low. The Dow Jones Industrial Average dipped nearly 0.1%. The index had closed at an all-time high of 36,157 on Wednesday, but couldn’t gather enough steam to beat that level on Thursday.

• On the data front, US jobless claims totalled 269,000 for the week ended 30 Oct, the lowest pandemic-era total and better than the 275,000 expected by economists polled by Dow Jones. The real test will come tonight, when the Bureau of Labour Statistics publishes its monthly payrolls report. Economists expect the US economy to have added 450,000 jobs in the month of October, above September’s result of 194,000.

• Asian equities liked the Fed’s patience, as markets headed for gains. The MSCI Asia Pacific Index climbed as much as 0.7%, driven by gains in technology shares including Tencent, Alibaba and Keyence. Japan and China led gains around the region, with stocks also climbing in Indonesia and Hong Kong. Markets in Singapore, India and Malaysia were closed for holidays.

Kaisa misses payout

• Chinese developer Kaisa Group Holdings Ltd missed payments on wealth management products it guaranteed, the latest sign of stress in the nation’s beleaguered real estate industry. Kaisa’s bonds and shares tumbled on Thursday on mounting concerns over its financial health. The company joins troubled industry giant China Evergrande Group in seeing its cash crunch reach the point where it hurt investors in high-yielding wealth products.