Global bonds jump in best month since 2020 on recession fears

Inflation is therefore in the first half, at least as far as bond investors are concerned.

Global bonds head for biggest monthly gain since November 2020 – with Bloomberg index up 1.8% – as market focuses on fear of recession amid rapid interest rate hikes interest of the Federal Reserve. That’s a far cry from the previous six months, when the strongest inflation prints in a generation drove the gauge to a cumulative loss of 14%.

Fed Chairman Jerome Powell’s signal on Wednesday that tightening could slow depending on economic data only added to the rebound. A report released the next day showing that the US economy contracted for a second quarter appeared to have all but confirmed a global contraction as the new baseline scenario for investors, which should dampen the upward trend in consumer prices.

“History tells us that recessions tend to lead to lower inflation,” Societe Generale SA strategists, including Subadra Rajappa in New York, wrote in a report. “Global bonds staged an impressive rally as a dovish Fed and weaker data continued to stoke recession fears. Markets were quick to assess Fed and Bank rate hikes. central Europe for the coming year, relying on higher key rates and the destruction of demand to contain inflation.

Australian government and corporate bonds jumped 2.4% in July, which is predicted for the biggest monthly gain since May 2012. That doesn’t even include Friday’s gains following product data U.S. gross domestic, which sent 10-year government bond yields plummeting. up to 18 basis points. The index had fallen 9.5% in the first half, with losses exacerbated by a series of central bank policy missteps.

Globally, corporate bonds were among the top gainers. An index that tracks investment-grade euro-denominated corporate debt returned 4.7% in July, forecast for a record monthly gain. U.S.-currency debt from investment-grade emerging Asian issuers is heading for the best month since November 2020.

Still, some analysts and investment strategists have warned that the rally in high-quality corporate bonds could fade quickly due to the risk of recession in some major economies, continued distress in the Chinese credit market and the increased risk of default.

Not everyone is convinced the rebound will last.

“I can’t help but feel that this is a rally rather than the start of a slight rate revision,” said Skye Masters, head of fixed income research at the National Australia Bank Ltd. in Sydney. “The risk to the market is that the Fed doesn’t start easing policy as soon as expected and inflation remains elevated.”

© 2022 Bloomberg

Comments are closed.