Bonds: Gilts jump as traders ready for Yellen speech

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

US: 1.54% (-4bp)

UK: 0.56% (-6bp)
Germany: -0.09% (-6bp)
France: 0.135% (-5bp)
Italy: 1.10% (-3bp)
Spain: 0.94% (-2bp)
Portugal: 3.03% (+2bp)
Japan: -0.06% (+2bp)
Greece: 8.04% (-1bp)

Longer-dated Gilts advanced even as the pound strengthened and despite hawkish remarks from the US central bank’s second-highest ranking official over the weekend.

In remarks made on 21 August, Federal Reserve vice chairman Stanley Fischer, widely-considered to be a close ally on policy of chair Janet Yellen, said rate-setters Stateside were close “to [reaching] their targets” for growth and inflation.

He was speaking just under a week before Yellen’s much-awaited speech at the Kansas City Fed’s annual economic symposium in Jackson Hole, with at least a few economists waiting on her comments to see if the Fed might move as soon as September.

To take note of in that regard, some market commentary on Monday was again calling attention to the price of funds on the interbank market in the wake of the previous Friday’s fixing for the three-month US dollar London Interbank Offered Rate at 0.81711%, which marked its first weekly decline since June.

A week earlier it was being quoted at 0.81825%.

Expectations of Fed tightening aside, most market commentary appeared to ascribe the move higher in three-month dollar LIBOR to new regulations for US money market funds which were due to come into effect in October.

At least a handful of observers said the tightening in financial conditions that resulted from such a move justified the Fed remaining on hold until it met in December.

Back in the UK, the Bank of England’s latest reverse Gilt auction met with a still solid bid-to-cover ratio of 2.93, versus 3.54 the last time around. On this occasion, the Old Lady on Threadneedle Street concentrated its purchases on government debt maturing in between three and seven years’ time.

No first-tier economic data were released on Monday on either side of the Pond, although various reports called attention to survey findings which pointed to a rapidly cooling pace of infrastructure investment in the UK after the referendum vote.

On a related note, in a research note sent to clients on 19 August economists at Bank of America-Merrill Lynch wrote: "We expect growth to modestly undershoot BoE forecasts and so expect the central bank to cut rates again, to 10bp, in November. Potential fiscal stimulus could reduce the need for another rate cut, but, on balance, we still expect the BoE to move."

German bunds were also strong performers, snapping back after the previous week’s sharp losses, with some market commentary highlighting how five-year/five-year euro area inflation break-evens continued to trade near record lows.