Global Bonds Extend Gains as Recession Concerns Take a Firm Hold

(Bloomberg) — Global bonds climbed for a second day, sending German benchmark borrowing costs tumbling to the lowest since May as investors sought out havens amid mounting fears of a recession.

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The benchmark 10-year Treasury yield fell to as low as 2.89% — well below the closely watched psychological level of 3% and back where it was before Friday’s stronger-than-anticipated US jobs data. Germany’s 10-year yield slid to a six-week low after investor confidence in the economy slumped to the lowest since 2011, while the euro came within a whisker of falling to parity against the dollar for the first time in 20 years. UK borrowing costs tumbled as much as 14 basis points and the pound plumbed fresh lows against the dollar.

This week’s sharp pullback in yields has maintained a recent pattern of volatile swings in bonds amid constrained liquidity. Federal Reserve interest-rate hikes are seen raising the risk of recession, reviving the appeal of fixed-income securities.

“Global markets are clearly very nervous about aggressive Fed hikes, European gas shortages and fears Russian action on energy supplies could help lead to recession, and about the US earnings season,” said Andrew Ticehurst, a rates strategist at Nomura Holdings Inc. in Sydney. “We are seeing consistent signals from all asset classes, with equities weaker, credit spreads wider, yields lower, the Aussie dollar lower and the US currency higher.”

White-Knuckled Bond Investors Confident Only in More Havoc

While economists expect Wednesday’s key US inflation data to show consumer-price gains accelerated to a fresh 40-year high, bond investors have become more certain the Fed’s aggressive tightening will help bring prices under control. The 10-year breakeven rate has subsided to near 2.3%, after peaking above 3% in April.

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A key gauge of expected price swings for US Treasuries pushed higher Monday as Treasuries rallied amid thin volumes. Last week it hit the highest since the March 2020 pandemic panic.

“There’s no sign of a summer lull in volatility,” said Jack McIntyre, portfolio manager at Brandywine Global Investment Management. “We’re starved for information that gives us clarity on the growth, inflation dynamic,” and “we need more time to figure out how much inflation comes down.”

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