Global Bond Markets Experience Shifts Amid Federal Reserve and BoE Decisions

German government bond yields fell for a sixth day as the U.S. Federal Reserve hinted at a September rate cut. Economists predict multiple cuts amid economic uncertainty. The BoE may also cut rates. European bond markets remain active, with France and Spain conducting long-term bond auctions.

German government bond yields dipped for the sixth consecutive day on Thursday, marking their longest stretch of gains since November. This came after the U.S. Federal Reserve signaled the possibility of a rate cut as early as September, giving a boost to Treasuries. Fed Chair Jerome Powell emphasized that price pressures were easing broadly, and if upcoming data aligns with expectations, support for rate cuts would strengthen.

Benchmark bund yields for the eurozone fell 1.5 basis points to 2.289%, heading for a sixth straight day of declines and finishing July with an 18-basis-point drop. Yields and bond prices move inversely. Economists at PIMCO suggested that the uncertain outlook, compounded by the U.S. presidential election and potential policy shifts, might lead the Fed to cut rates several times starting in September.

The gap between U.S. 10-year Treasuries and German Bunds widened by 2.5 basis points to 177 bps, reversing much of Wednesday's narrowing. Later in the day, the Bank of England is set to announce its monetary policy decision, with markets seeing a 61% chance of a rate cut. Ten-year gilt yields fell by 2.5 basis points to 3.95%, with their premium over Bunds tightening to 165 basis points.

The BoE is contemplating a rate cut after holding them at a 16-year high of 5.25% for the past year. However, markets and economists are uncertain if the British central bank will make this move. BofA noted that although the data doesn't conclusively show that inflation persistence has been beaten, the dovish BoE might justify a cut by downplaying any upside strength.

Should the BoE maintain current rates, attention will shift to September. Italian 10-year yields increased by one basis point to 3.66%, with their premium over Bunds widening to 137 basis points. France and Spain are set to conduct long-term bond auctions. Commerzbank strategists highlighted that European government bond markets remain busy with scheduled auctions, especially in long-end OATs, aligning with seasonal patterns.

The gap between French and German yields, indicating the risk premium for holding French government bonds, hit a post-election high of 72.70 basis points. This gap widened as market concerns grew over potential parliamentary actions to reverse President Emmanuel Macron's pension reforms, potentially increasing public spending.

(With inputs from agencies.)