Bonds: Europe takes the lead as Government bond rally continues

This week we saw more enthusiasm for government bonds as investors doubled down on the view that central banks will cut rates in 2024 and will cut them significantly. European government bonds led the rally following comments from several ECB members that appeared to confirm the view that the bank has finished hiking following the rapid slowdown in inflation. This was supported by lacklustre European economic growth. However, mixed signals on the strength of the US jobs market meant US government bonds gave back most of their gains.

The shift in sentiment has been dramatic. Only a few weeks ago the ECB was expected to leave rates elevated for longer than the Bank of England and Federal Reserve but markets are now pricing in up to six cuts in 2024 with rates brought down by 1.5 percentage points. Many bond investors will be cheered by the gains but the rapid change in outlook increases the chance that recent enthusiasm is overdone. In the short term markets are likely to be driven by each fresh data release or speech by a central banker. 

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