Two things we can say about the current price action.
First, it is clearly directed from the United States. Chairman Powell’s change of tone after the FOMC was as dramatic as it could be in a context where, in fact, much has not changed. Therefore, rate cuts in 2024 are a possibility. At least there is no clear objection from the Federal Reserve. The question is when and to what extent. We’ve been on 150 bp cuts in 2024 for some time, so no changes here. We’ve seen before that the bond markets’ love cycle turns toward cuts, and we’re getting a strong sense of it.
Second, the ECB and the Bank of England are adopting a more traditionally hawkish stance. The implication of this for market rates has been a tightening of spreads. For example, the spread between the Treasury and the Bund is tighter by about 20 bps, and by 30 bps in the second year. But even with this adjustment (outperformance in the United States), both bond and eurozone yields have fallen. Had it not been for Chairman Powell, it is highly unlikely that we would have had a move lower in peripheral yields beyond the US over the course of this entire week.