Weaker-than-expected US economic data spurred a rally in government bonds on both sides of the Atlantic.

US producer price inflation for October came in well below expectations. The core inflation figure fell the most since August 1993. Meanwhile, total retail sales fell slightly less than expected in October but September’s figure was revised sharply downwards.

The data helped reignite investors’ hopes that the US Federal Reserves might cut interest rates early next year in response to a weakening economy, in spite of recent hawkish comments by Fed officials.

As bond prices rallied, the yield on the two-year US Treasury fell 2.6 basis points to 4.751 per cent by late afternoon in New York and the 10-year note was yielding 4.576 per cent, down 3.7bp.

The rising US market helped lift eurozone government bonds, which had earlier struggled in spite of bond-friendly data of their own.

Eurozone economic growth came in weaker than expected and there was another decline in a key German business sentiment index. In late trading in London, the yield on the two-year Schatz was 0.6bp lower at 3.703 per cent and the yield on the 10-year Bund was down 1.5bp to 3.714 per cent.

Gilts were already cheered by lower-than-expected UK inflation data. Though October’s annual inflation figure of 2.4 per cent remained above the Bank of England’s target, it was still less than analysts’ forecasts.

The two-year gilt yield lost 4.6bp to 4.957 per cent and the 10-year gilt was yielding 4.531 per cent, 3.3bp lower.

However, Japanese government bond prices plunged after data showed that the Japanese economy grew by more than expected in the third quarter. Gross domestic product data showed that strong exports more than offset weak domestic consumption to produce annualised growth of 2 per cent, more than double market forecasts of 0.7 per cent.

Investors fear the rosy data may lead to another interest rate increase before the year-end. The Bank of Japan will meet for its two-day policy board meeting today. The yield on the 10-year JGB rose 6.5bp to 1.72 per cent.

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