Tradeweb Government Bond Update – May 2023

Global 10-year government bonds saw mixed moves in May 2023 amid a flurry of central bank decisions.

The biggest mover was the UK 10-year Gilt, whose mid-yield rose 45 basis points over the month to finish at 4.17%, after closing as high as 4.36% on May 25. Meanwhile, the bond’s spread against its German counterpart widened to 190 basis points. On May 11, the Bank of England (BOE) raised its base interest rate from 4.25% to 4.5%, its highest level since 2008. The BoE’s Monetary Policy Committee said it will continue to adjust the Bank Rate as necessary to return inflation to the 2% target sustainably in the medium term, in line with its remit. The first quarterly GDP estimate released by the Office for National Statistics showed that the UK economy grew by just 0.1% between January and March 2023, narrowly avoiding contraction. Neither the BoE nor the International Monetary Fund expect the UK to enter a recession this year.

In the Euro area, most 10-year government bond yields saw relatively muted movements during the month, with only those for Greece bucking the trend with a drop of 43 basis points to 3.64%, their lowest level since August 2022. Prime Minister Kyriakos Mitsotakis' New Democracy party won a bigger victory than polling suggested in the snap parliamentary elections held on May 21. However, it fell short of a governing majority, leading to a fresh round of elections to be held on June 25. The Greek annual inflation rate slowed to 3% in April 2023 from 4.6% in March 2023 and 10.2% in April 2022, marking its lowest reading since September 2021.

Canadian and Australian 10-year government bond yields also saw sizable moves in May, rising 34 and 30 basis points to end the month at 3.18% and 3.59%, respectively. Canada’s economy grew by 0.8% in Q1 2023, beating market estimates of a 0.4% expansion. In Australia, the Melbourne Institute of Consumer Sentiment index fell by 7.9%, from 85.8 in April to 79.0 in May. Data released by the Australian Bureau of Statistics on May 18 showed that the jobless rate unexpectedly rose to 3.7% in April 2023, higher than market expectations of 3.5%.

In the U.S., the yield on the 10-year Treasury note closed the month 18.5 basis points higher at 3.64%. Total nonfarm payroll employment increased by 339,000 in May, and the unemployment rate rose to 3.7%, a seven-month high. On May 3, the Federal Reserve hiked its target range to 5-5.25%, bringing borrowing costs to their highest level since September 2007. Multiple Fed officials have suggested rate increases will continue this year, even if there is no hike at the June meeting. In May, the ISM Manufacturing PMI fell to 46.9 from 47.1 in April; however the S&P Global US Services PMI increased to 54.1, up from 53.6 the month prior.

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