Government bonds rally on fears of global economic slowdown

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

The disappointing data fanned concerns that global growth is waning at a time when central banks are raising interest rates aggressively in an attempt to tame the highest inflation rates in decades.

Germany’s 10-year Bund yield dropped 0.21 percentage points to 1.42 per cent, reflecting a rise in the price of the benchmark debt instrument, after a closely watched survey of business activity in the euro area registered a reading of 51.9 for June — a 16-month low and well beneath consensus estimates of 54. Bond prices rise when yields fall.

US government debt prices also surged higher, with the yield on the 10-year Treasury note, seen as a benchmark for borrowing costs worldwide, dropping 0.10 percentage points to 3.05 per cent. The two-year US yield, which closely tracks interest rate expectations, fell 0.07 percentage points to 2.98 per cent.

On Wednesday, Federal Reserve chair Jay Powell said during the first of two days of congressional testimony that recession was “certainly a possibility” for the world’s largest economy — though he argued that it was sufficiently resilient to withstand tougher monetary policy. He added on Thursday that the Fed had an “unconditional” commitment to fight inflation, which hit 8.6 per cent in May.

“The bond market is grappling with the idea that central banks are hiking rates into a pretty sharp slowdown,” said Peter Goves, a fixed-income analyst at MFS Investment Management. “The growth concerns have been around for a while, but they’ve suddenly moved into focus.

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

In equity markets, Wall Street’s S&P 500 was roughly flat in afternoon trade in New York. The technology-heavy Nasdaq Composite rose 0.6 per cent, but remained almost 30 per cent lower for the year. Europe’s Stoxx 600 index closed down 0.8 per cent, while Germany’s Dax index fell 1.8 per cent, with a 12 per cent drop for Deutsche Bank and a 6 per cent decline for Mercedes-Benz.

Kit Juckes, global fixed-income strategist at Société Générale, suggested there will be little clarity in markets until after the summer.

“It’s all as clear as mud,” he said. “It doesn’t matter how much you put interest rates up now, demand is going to be red hot this summer and then it could cool off or maybe it carries on.”

Norges Bank on Thursday joined a wave of central banks raising interest rates aggressively to tackle inflation, lifting borrowing costs by 0.5 percentage points to 1.25 per cent in its first such increase since July 2002. Norway’s rate rise followed on from the Fed raising rates by 0.75 percentage points last week, its biggest increase since 1994.

The Bank of England and the Swiss National Bank also raised rates last week, while the European Central Bank has spelt out plans for its first increase in more than a decade next month.

Oil prices slipped 1 per cent to $110.64 a barrel on Thursday, extending losses from the previous day.

In Asian markets, Hong Kong’s Hang Seng share index gained 1.3 per cent and Japan’s Topix index was flat.