After weeks of somewhat muddled price action in financial markets the tone last week shifted more clearly towards “risk on”. The pronounced fall in international government bond yields in the first half of the week was undeniably a driver of stronger global risk appetite although yields have since rebounded.
Despite the Federal Reserve so far having taken a more hands-off approach than some major central banks, the benchmark 10-year US Treasury yield fell 4bp from 5th March to 1.54% on 11th March. However, in the wake of President Biden officially signing into law his $1.9 trn fiscal stimulus package late on 11th March 10-year yields have rebounded to around 1.62%. This did not stop the S&P 500 closing at a new record high of 3,943 on Friday and the “safe-haven” Dollar depreciated about 1% in trade-weighted terms last week.
In Australia, RBA Governor Lowe reiterated the central bank’s dovish outlook for policy rates and long-end yields fell to a 2-week low of 1.62% on 11th March before retracing to the top-end of their fortnightly range. This was mirrored in the Australian Dollar’s performance – it made strong gains from 5th to 11th March (about 1.3% in trade-weighted-terms) but has since given about back about 0.3 percentage points.
Price action in the UK has been a little different. 10-year Gilt yields edged lower in the first half of the week but rebounded sharply on Friday to their highest level since early December 2019. But this seemingly had little impact on Sterling, with the trade-weighted index oscillating in a narrow range of just 0.5% to end the week up about 0.3%. Better-than-expected UK GDP data released on 12th March seemingly helped put a floor under Sterling. GDP contracted 2.9% mom and 9.2% yoy in January but analysts had estimated that the UK economy, still in full lockdown, had contracted 4.9% mom.
The Euro was another currency which did not react much to gyrations in major Eurozone government bond yields. The European Central Bank at its meeting on 11th March left its policy rate unchanged at -0.50% (in line with expectations) but stated that with immediate effect it would significantly accelerate its bond purchases in the next three months compared to year-to-date. The Euro trade-weighted index ended the day and the week broadly unchanged.
The safe-haven Swiss Franc and more risk-sensitive New Zealand Dollar also ended the week broadly flat.
