Bonds: Economists see December Fed hike, but harbour doubts

These were the movements in the yields of some of the most widely-followed 10-year sovereign bonds:

US: 1.73% (-4bp)

UK: 1.02% (-2bp)
Germany: 0.04% (-3bp)
France: 0.33% (-4bp)
Spain: 1.12% (+5bp)
Italy: 1.38% (-4bp)
Portugal: 3.37% (-3bp)
Greece: 8.39% (+8bp)
Japan: -0.06% (0bp)

Longer-term sovereign bonds pushed higher almost across-the-board after Chinese trade data for September surprised to the downside amid a relatively sparse economic agenda and doubts in the market over the most correct interpretation of the latest Fed minutes.

Nevertheless, economists pointed out that the chief weakness evident in the Asian giant's trade numbers was in demand from overseas and not so much on the domestic front.

In paralell, market commentary following the release of the latest set of Fed policy meeting minutes, overnight, was rather mixed, with the Wall Street Journal pointing out how dividend-paying stocks led gains on Wall Street.

Some economists, such as those at HSBC, Citi or Barclays also revealed a certain degree of wariness regarding the possibility of a December rate hike.

The latter two investment banks stuck to their view for a December hike, albeit with nuances.

In the case of Citi, economist Andrew Hollenhorst told clients: "Minutes from the September FOMC confirm our view that policymakers are likely to judge recent readings from the US economy as more than adequate to justify a rate hike in December. The subsequent pace of rate hikes is likely to be slower than Fed “dots” given the view that slack remains in the labor market and participants’ downward reassessment of the neutral rate of interest."

For his part, Ryan Wang at HSBC said: "The overall labor market improved further in September, but the stability of the unemployment rate so far this year suggests that employment may have room to grow further without generating undue upward pressure on inflation. We continue to hold to our view that Fed rate hikes are likely to be few and far between, with the next rate increase coming in the middle of 2017. We expect a single 25bp rate hike in 2017 and another one in 2018."

Back on the subject of Gilts, the FT cited Bank of Tokyo-Mitusubishi's Derek Halpenny as cautioning that inflation resulting from previous bouts of weakness in Sterling had proved temporary and that it might be premature to conclude that foreign investors had taken fright.

In any case, Halpenny believed the drop in Gilts had little to do with the fall in Sterling.

Spanish bonds were on the backfoot as market commentary focused on the risk that interim Prime Minister Mariano Rajoy might face a confidence vote later in October.