Government bond markets rallied strongly last week as easing energy prices supported duration across major markets. While headlines suggesting progress towards a ceasefire between the US and Iran helped improve sentiment, the dominant market theme was a broad repricing lower in inflation expectations and policy-rate expectations.
US Treasuries posted gains across the curve, with yields falling 12bp at both the 2-year and 5-year maturities to 4.00% and 4.14%, respectively. The 10-year Treasury yield declined 12bp to 4.44%, while the 30-year yield fell a more modest 9bp to 4.97%, resulting in a slight steepening at the long end. Inflation concerns also eased, with the 10-year breakeven inflation rate edging down to 2.40% and the 10-year real yield falling 11bp to 2.04%.
European government bonds participated in the rally despite continued hawkish ECB rhetoric. German yields declined 10-12bp across maturities, leaving the 10-year Bund yield at 2.94%. French, Italian or Spanish bonds rallied in parallel, with yields also down 10-12bp across curves.
The 10-year Swiss yield fell 16bp to 0.41%, while 2-year and 5-year yields declined 13bp and 15bp, respectively. Elsewhere, the UK 10-year gilt yield fell 9bp to 4.81%, while Japan's 10-year government bond yield declined 10bp to 2.67%.
The decline in yields translated into strong returns for duration-sensitive fixed income products. Among US government bond ETFs, performance ranged from 0.22% for short-dated Treasury funds to 1.28% for the 20+ year segment. Euro government bond ETFs also delivered solid gains, with longer-duration strategies outperforming shorter-maturity funds.
Emerging market
Emerging market debt delivered positive weekly returns across USD sovereigns, local currency sovereigns and EM corporates over the past week, supported by resilient risk appetite and continued inflows into the asset class. EM debt funds recorded inflows for a seventh consecutive week.
What’s more, a key positive development came from Colombia’s first round of the presidential election over the weekend. Abelardo de la Espriella, widely viewed as more market friendly has outperformed Iván Cepeda who is backed by outgoing unpopular President Gustavo Petro.
Markets reacted positively, with US$ bonds issued by Ecopetrol, the country's 88.5%-state-owned energy company, rallying across the curve.
Adelardo de la Espriella secured 43.7% of the vote, against Cepeda, who received 41.0%. The second runoff election is scheduled for 21 June.
Investors appear encouraged by the possibility of a policy shift after several years of uncertainty surrounding Colombia's energy sector.
Petro has generally been viewed as market-unfriendly, notably through his decision to halt Ecopetrol’s new oil and gas exploration contracts, raising concerns about long-term energy production.
By contrast, de la Espriella is broadly regarded as more market-friendly. He advocates tax cuts and regulatory simplification to attract foreign investment, a tougher stance on security that could improve operating conditions for the oil, mining, infrastructure and logistics sectors, and a more investment friendly approach in energy sector.
That said, potential caveats could come from tax cuts without credible spending restraint. De la Espriella's populist and confrontational style may introduce a degree of institutional uncertainty. The next three weeks therefore remain an important focus for Colombian assets.
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