Germany's 10-year government bond yield dropped to its lowest in six months on Tuesday and world shares paused around four-month highs as traders upped bets on European Central Bank rate cuts early in 2024 and grappled with the Federal Reserve's outlook.
The 10-year Bund yield dropped as much as 7 basis points to 2.28%, its lowest since June 2, after European Central Bank official Isabel Schnabel said in an interview with Reuters that further interest hikes are "rather unlikely", after an unexpectedly big fall in inflation.
Bond yields move inversely to prices and government bonds in most developed markets globally took a battering in 2022 and earlier this year after a rapid rise in central bank policy rates.
"The final nail in the coffin for further rate hikes, even if no one was expecting any," said Andrzej Szczepaniak, senior economist at Nomura, of Schnabel's comments.
Traders are now nearly fully pricing in a 25 basis point rate cut from the European Central Bank at its March meeting, and nearly 150 basis points of cuts by the end of 2024.
The euro dipped, recovered and was last down slightly at $1.0829 .
Rate cuts are also expected in the U.S. with traders seeing 50 basis points of cuts as more likely than not by June. The 10-year U.S. Treasury yield was down 5 basis points at 4.24%, walking back some of the previous day's 6-basis-point rise.
"The market has more or less priced the soft landing scenario (for the U.S. economy) to perfection," Bank of Singapore strategist Moh Siong Sim said. "Overnight there was a bit of a reality check - maybe it was too ambitious."
U.S. job openings data is due at 1530 GMT, and the week's most important data release, U.S. non farm payrolls data, which last month showed signs of a slowdown in the job market, will be published on Friday.
Equity markets retreated somewhat on Tuesday with the MSCI world index (.MIWD00000PUS) down 0.17%, edging off a four-month high hit Monday after a storming November, when the expected rate cuts powered stocks higher in the U.S. and Europe.
Europe's broad STOXX 600 index was flat (.STOXX), though U.S. S&P 500 futures dipped 0.25% . Earlier in the day, MSCI's broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) fell 1.1%, with Hong Kong doing most of the dragging with a 1.9% fall. (.HIS)
The Hang Seng Index is down more than 17% for the year so far, while world stocks are up almost 15%, as investors have streamed out of Chinese assets while the economy stumbles.
Late in Asian trading, ratings agency Moody's cut its outlook on China's government credit ratings to negative from stable, citing lower medium-term economic growth and risks from a major correction in the country's vast property sector.
