Global bond markets see best 2-month rally ever as rate-cut bets climb

• Global bonds are set for their biggest two-month gain ever, Bloomberg data shows. 
• Bets that central banks will lower interest rates has driven traders to buy government bonds.
• Investment-grade debt has also rallied, hitting a separate record of almost 11% since early November.

Global debt is on track for a record two-month rally, as investors are betting big that central banks around the world are ready to turn dovish.

Through November and December, lower inflation metrics have made traders increasingly confident that current interest rate levels have achieved their aims, and that policy will need to pivot before sparking recessionary slowdowns.

This has propelled investors to buy bonds, with the Bloomberg Global Aggregate Total Return Index jumping almost 10% in the two-month stretch, its highest since data collection began in 1990, Bloomberg reported.

In the US alone, a rally into government bonds has been defying expectations, especially given the market crash that preceded it was among the worst in history. Where the benchmark 10-year yield surpassed 5% in October, it has tumbled 120 basis points to about 3.82%.

And earlier concerns over slumping demand for US debt also appear to have abated, as recent Treasury auctions in two-year and five-year assets have pulled in buyers. 

Apart from US Treasurys, French and German government bonds, as well as US mortgage-backed securities, were the leading contributors to Bloomberg's index.

In 2024, Fitch Ratings is forecasting that global growth will drop significantly, reaching 2.1% compared to this year's 2.9% outlook. With economies cooling, swaps traders indicate 150 basis points of rate cuts for the US next year, and predict 170 basis points of cuts in the eurozone, Bloomberg noted.

But these expectations may be too optimistic, with the Fed's dot plot currently indicating only 75 basis points through next year. Meanwhile, Europe may not yet be ready for cuts, European Central Bank Governing Council Member Robert Holzmann said on Thursday.

Separately, investment-grade corporate bonds have also rallied sharply, climbing nearly 11% since November. This marks another two-month record gain, and comes as tighter spreads have pushed credit to outperform government debt. 

November saw the corporate fixed-income space hit its biggest inflows since 2020, while investors also showed renewed enthusiasm for riskier assets, sending junk bond investments surging.