Treasuries on track for best month since 2015 amid investor gloom
Treasuries are on track for their biggest monthly rally in more than four years as bond markets have sounded a recession warning, with rating agency S&P warning investors it is on “high alert” for the US economy.
Stocks rose and government bonds steadied on Friday after a volatile week of trading driven by a cocktail of mounting and connected risks centred on the impact of the US-China trade dispute on global growth.
A new report from S&P said the risk of a US recession in the next 12 months had increased to 30-35 per cent, up from the 25-30 per cent previously.
“Unpredictability on the trade front and deteriorating global backdrop (led by industrial weakness) are the key reasons for high alert,” the agency said.
Investors have largely shunned risk assets and moved into havens, a trade which has sent the yield on government bonds from Germany to New Zealand tumbling, as investors have moved into the debt.
The yield on the benchmark US 10-year Treasury note has fallen by 46 basis points so far this month, leaving it on track for its biggest decline since January 2015, according to Bloomberg data.
Earlier this week, poor economic data from two trade-exposed economies, China and Germany, sent yields of US and UK 10-year government bonds below those of shorter-maturity debt for the first time since the financial crisis — an inversion of their normal relationship that has historically been a harbinger of recession.
Typically, longer-term debt trades with higher yields to compensate investors for the risk of holding debt for a longer time. When the yield curve flips, it is generally seen as a strong signal that investors are expecting an economic downturn.
The 10-year US Treasury yield nudged 3 bps higher on Friday morning, while global markets also rose. The S&P 500 was 0.8 per cent higher in early trade, while European and Asian markets also gained.
Sentiment was boosted by signs the European Central Bank plans significant stimulus at its next meeting in September.
Olli Rehn, a senior official at the central bank, told the Wall Street Journal that “it’s important that we come up with a significant and impactful policy package in September”.
“When you’re working with financial markets, it’s often better to overshoot than undershoot, and better to have a very strong package of policy measures than to tinker,” he said.
President Trump also made positive comments about the trade dispute in China, telling reporters late on Thursday that he has a call scheduled with President Xi “very soon”.
Hong Kong’s Hang Seng index gained 0.9 per cent, with the city’s battered property stocks among those posting the strongest gains.