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Government Bond Update - October 2017

| Tradeweb

Government bond yields dropped across Europe over the course of a particularly volatile October. The biggest move occurred in Italy, where the mid-yield on the 10-year benchmark note recorded its largest monthly decline in over two years, closing out 35 basis points lower at 1.82%. Key events that dominated headlines during the month included an unexpected upgrade to the country’s S&P sovereign credit rating, from BBB- to BBB; and the adoption of a new electoral system that is expected to stifle a rising tide of anti-establishment candidates.

Similarly, Portugal’s 10-year bond mid-yield hit its lowest level since December 2015, falling nearly 32 basis points to end the month at 2.06%. In its draft budget for 2018, the Portuguese government stated that next year’s budget deficit would narrow to 1% of GDP, down from 1.4% in 2017.

Double-digit declines in government bond yields were also on tap in Spain. Against a backdrop of continued political turmoil, the yield on the country’s 10-year benchmark note finished at 1.45%, a decrease of 16 basis points from the previous month end. Prime Minister Mariano Rajoy assumed direct control of Catalonia, following the region’s declaration of independence on October 27.

A day earlier, the European Central Bank had announced that it would dial back its bond-buying stimulus program, but keep it in effect until September of 2018. Germany’s 10-year Bund mid-yield closed 10 basis points lower at 0.36%. Yields also fell in Ireland and France by 16 and 15 basis points respectively.

Elsewhere in Europe, the yield on the UK 10-year Gilt declined by 3 basis points to 1.33%. The International Monetary Fund cut the country’s annual growth forecast from 1.9% to 1.7%. However, at the end of October, third-quarter economic growth figures came in at 0.4%, higher than a preliminary estimate of 0.3%.

Across the Atlantic, the U.S. Treasury 10-year mid-yield moved up by almost 5 basis points to finish October at 2.38%. September’s nonfarm payroll data showed a loss of 33,000 jobs, the first drop in seven years. Later in the month sentiment shifted, as Q3 GDP data showed that the economy had advanced by an annualised 3%, beating forecasts of a 2.5% expansion.

Mid-yields for Japanese 10-year debt also increased in October, albeit by just a fraction of a basis point to close at 0.06%. The country started the month with strong results from the Bank of Japan’s Tankan survey measuring business confidence among large manufacturers, which had climbed to its highest level since 2007.

2017 October government bond data