Government bond markets rise as growth fears outweigh inflation
Government bond markets regained part of their steep losses this year in recent weeks as investor attention shifted from rising inflation to signs of slowing economic growth.
Bonds have had a steep year so far as major central banks rush to contain runaway price increases by initiating a rapid tightening of monetary policy. But long-term government debt – a very safe asset that tends to benefit from concerns about the health of the economy – has stabilized in recent weeks as the sell-off of riskier assets such as stocks accelerated.
Bloomberg’s gauge of long-term US government bonds is on track for a third straight weekly rise, gaining more than 4 percent since May 6, a shift that reverberates in European markets. Although the recovery is still modest compared to the size of the previous declines – the index is down more than 18 per cent year-to-date – some investors feel the turning point of the sharpest global bond sale in decades.
“We’ve rarely been as optimistic about government bonds as we are now,” said Mike Riddell, senior portfolio manager at Allianz Global Investors. “If growth slows, inflationary pressure will abate, and yields will look more attractive than they have long been.”
The yield on US 10-year government bonds – a benchmark for financial assets worldwide – fell to 2.73 per cent from 3.2 per cent two weeks ago. The German equivalent yield also fell, from nearly 1.2 percent to 0.96 percent.
Although the Fed is still in the early stages of raising interest rates — while the European Central Bank has yet to raise borrowing costs from record lows — the anticipation of tough policy tightening has already had a significant impact on markets and the economy, accordingly. To Riddell, who cited the example of declining home sales in the United States as mortgage rates rose.
“Over the past month, we have moved from the dominance of inflation problems to recession fears that are becoming an increasingly worrying cause,” said George Goncalves, head of US macro strategy at MUFG Securities. “It is possible that we have reached the highest level in [US] The 10-year yield is likely to continue to decline in long-term rates in the summer months. “
While US inflation is still close to its highest level in decades, market expectations for long-term inflation are beginning to recede. The five- and five-year forward break-even rate — a measure of inflation expectations over five years, five years from today — fell on Wednesday to 2.2 percent, its lowest since March 1. Highest level of the year in mid-April.
In the US, evidence of an impending slowdown was seen in company earnings reports — such as that of retailers Walmart and Target, or the growth warning of social media group Snap this week.
But the economic data may be starting to shift. The Standard & Poor’s PMI showed on Tuesday that business activity in the US, UK and EU all declined in May.