LONDON, Dec 28 Reuters A huge twomonth rally in bond prices, powered by expectations that central banks will soon be cutting interest rates, has rescued fixed income markets from an almost unheardof third straight year of declines.

The U.S. 10year Treasury yield , the benchmark for borrowing costs globally, has dropped 50 basis points bps in December after falling 53 bps in November. Its twomonth fall is the biggest since 2008, when the Federal Reserve was slashing rates during the global financial crisis.

ICE BofA39;s global broad bond market index, which includes government and corporate debt, has rallied roughly 7 over the last two months its strongest eightweek period on record, according to LSEG data which goes back to 1997.

The sharp drop in yields, which move inversely to prices, has eased pressure on companies and households as well as housing markets and governments that in October faced the steepest borrowing costs in more than a decade.

It has also been a balm for highly indebted countries such as Italy, where bond yields are poised for their biggest monthly fall since 2013.

HAWKS TURN DOVISH

Central bankers abruptly changed their tone on inflation in December, fuelling investors39; ratecut bets. That followed a blockbuster November, when data showed U.S. and European inflation falling much faster than expected.

We were surprised by the strength of this rally, said Oliver Eichmann, head of European fixed income at asset manager DWS.

The Fed39;s…