Bond yields tumble as bets on rate cuts mount amid fresh signs of easing inflation

Bond yields fell yesterday as fresh signs of easing inflation pressure threw the spotlight onto central banks ahead of key interest rate decisions.

UK figures showed a slowdown in wage growth while in America inflation dipped to 3.1 per cent.

The data comes ahead of the US Federal Reserve’s rate decision tonight. 

That kicks off an intense couple of days for central banks – and traders – with Bank of England and European Central Bank decisions due tomorrow.

None are expected to cut or raise rates. But the language they use will be closely scrutinised to see when cuts are likely to come, amid signs that high rates are already doing their job in cooling the economy.

Bond slump: UK figures showed a slowdown in wage growth while in America inflation dipped to 3.1%

Central banks have been pushing back against market bets that cuts will come in the first half of next year, emphasising that inflation still has some way to go before hitting its 2 per cent target. 

But yesterday’s data could add to pressure on them to change tack.

Yields on ten-year UK bonds –which fall as their prices rise – fell below 4 per cent. 

And US bonds initially fell too before reversing as investors judged that underlying inflation data was more mixed than headline numbers suggested.

In Britain, wage growth has come down sharply from record highs, though at 7.3 per cent for the three months to October it may still be a little strong for central bankers trying to cool price pressures.

And in the US, figures showed that year-on-year inflation fell from 3.2 per cent in October to 3.1 per cent in November. 

But prices rose by 0.1 per cent on a month-by-month basis, slightly dampening the prospects of Fed rate cuts.

Will Compernolle at broker FHN Financial said: ‘Watch for [Fed chairman Jerome] Powell to indicate the Fed is not yet ready to definitively rule out further hikes.’