Government bond markets rally on fears of economic slowdown

Government bond markets rallied on Thursday after a sharp slowdown in euro zone business activity heightened fears about the health of the global economy.

The yield on the 10-year German Bund fell 0.2 percentage point to 1.42%, reflecting a rise in the price of the benchmark debt instrument, after a closely watched survey of corporate activity in the euro zone recorded a reading of 51.9 for June – a 16-month low and well below consensus estimates of 54.

The disappointing data stoked concerns about declining global growth at a time when central banks are aggressively raising interest rates in a bid to rein in the highest inflation rates in decades.

US government debt prices also rose, with the yield on the 10-year Treasury bill, considered a benchmark for global borrowing costs, falling 0.12 percentage points to 3.04%. The US two-year yield, which closely tracks interest rate expectations, rose 0.12 percentage points.

On Wednesday, Federal Reserve Chairman Jay Powell said during the first two days of congressional testimony that a recession was “certainly a possibility” for the world’s largest economy – although he argued it was resilient enough to withstand tighter monetary policy. He added on Thursday that the Fed had made an “unconditional” commitment to fight inflation, which hit 8.6% in May.

“The bond market is grappling with the idea of ​​central banks raising rates in a fairly steep downturn,” said Peter Goves, fixed income analyst at MFS Investment Management. “Growth issues have been around for a while, but suddenly they’ve come together.”

“Central bankers have been much more focused on inflation recently – and rightly so,” he added, “but they need to thread that needle of tightening without undermining demand too significantly.”

In equity markets, Wall Street’s S&P 500 gained 0.5%. The tech-heavy Nasdaq Composite rose 0.8% but remained nearly 30% lower year-to-date. The European Stoxx 600 index fell 0.8%.

“The market is already down more than 20% [from its January peak] in the USA; much the same in Europe,” said Marco Pirondini, head of US equities at Amundi. “There’s a lot of stuff in the market already, which tells you there’s going to be a downturn.”

Kit Juckes, global fixed income strategist at Societe Generale, suggested there will be little clarity in the markets before the end of the summer.

“Everything is as clear as mud,” he said. “No matter how much you raise interest rates now, demand is going to be hot this summer and then it might cool off or maybe continue.”

Norges Bank joined a wave of central banks aggressively raising interest rates to fight inflation on Thursday, raising borrowing costs by 0.5 percentage points to 1.25% in its first such increase since July 2002. percentage points last week, its largest increase since 1994.

The Bank of England and the Swiss National Bank also hiked rates last week, while the European Central Bank outlined plans for its first hike in more than a decade next month.

Erica Dalstø, chief strategist for Norway at Scandinavian bank SEB, said hawkish moves by other central banks had allowed Norway’s central bank to deviate from its guidance. “It is clear that Norges Bank is increasingly concerned about inflation risks as it no longer refers to the risk on households.”

Oil prices slipped 0.5% to just over $111 a barrel on Thursday, extending losses from the previous day.

In Asian markets, Hong Kong’s Hang Seng stock index gained 1.3% and Japan’s Topix index was flat.