- After being hammered for the most part of this year, government bonds are seeing a rebound from fears over the health of the economy.
- Because the outlook for the global economy looks bleak, yields in sovereign debt, especially the safest ones, will continue to decline and the typical inverse correlation between bonds and stocks could reverse.
If the bond markets are communicating anything, it’s that investors are increasingly worried about growth as opposed to inflation.
After being hammered for the most part of this year, government bonds are seeing a rebound from fears over the health of the economy.
Benchmark U.S. 10-year Treasury yields, which had at one point shot past 3% for the first time since 2018, have now settled at a lower level that is well below the rate of inflation, with demand for haven assets returning while riskier assets have been dumped.
A Bloomberg gauge of long-term U.S. Treasuries is on course for its third consecutive weekly rise, a rebound echoed in European sovereign bonds as well.
For many investors who had rotated out into cash, shifting into bonds makes sense now as yields look the most attractive they have in a long time and cashing in early on yields now makes good sense before they start to fall further.
Yield on the benchmark U.S. 10-year Treasury has retraced to 2.71% from a high of 3.2$ just two weeks ago and on Thursday, it reached the lowest level since mid-April.
While inflation in the U.S. remains close to its highest levels in over four decades, market expectations of longer-term inflation have started to ease and worries about growth are starting to seep in.
In the U.S., evidence of an impending slowdown has been reflected in company earnings reports from some of the country’s biggest retailers and consumer staples companies.
Europe is contending with soaring energy prices and a war in its backyard while China is mired in a seemingly endless cycle of zero-Covid lockdowns.
Because the outlook for the global economy looks bleak, yields in sovereign debt, especially the safest ones, will continue to decline and the typical inverse correlation between bonds and stocks could reverse.
