A sharp rally in government bonds set fresh records on Thursday, with the yield on 30-year US government bonds falling below 2 per cent for the first time as investors sought safety amid growing fears over the global economy and renewed trade tensions.
Traders have dumped riskier assets such as stocks and crude oil and moved into perceived haven assets including bonds, driven by a growing list of interconnected fears including trade tensions between the US and China and slowing global growth.
"There is no doubt that the recession risk is rising amid further escalation of trade conflicts," strategists at BNP Paribas said.
In a new sign of the flight into bonds, the 30-year US Treasury bond yield dropped to as low as 1.916 per cent, its lowest level on records that go back to the 1970s and the first time it has fallen below 2 per cent. It was recently sitting at 1.958 per cent. The UK 30-year gilt also set a new record, falling below 1 per cent for the first time.
On Wall Street, US stocks climbed after better than expected US retail sales figures and a rosier outlook from industry behemoth Walmart provided some relief to investors worried about the health of the world's largest economy, although European shares remained lower.
The benchmark S&P 500 advanced 0.3 per cent, as retail optimism boosted shares in consumer staples and offset weakness in the energy sector. The tech-heavy Nasdaq Composite was down 0.1 per cent amid losses for technology names, while the Dow Jones Industrial Average rose 0.4 per cent after suffering its worst day of 2019 on Wednesday.
The trigger for this week's moves in the bond market was weak data from two trade-exposed economies, Germany and China, which raised fears of a global slowdown.
This saw yields of US and UK 10-year government bonds dip 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 and which crimps banks' profitability.
"There are lots of signals in the market suggesting there is a considerable amount to be concerned about," said Matt Cairns, a rates strategist at Rabobank.
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.
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"The world's major economies are creaking under the weight of trade-related concerns that are edging, with each piece of data, closer towards a global downturn that monetary policymakers will be largely unable to offset," said Cairns.
Adding to investor jitters, Beijing accused the US of "a severe violation" of previous agreements on trade over Washington's plans for 10 per cent tariffs on US$300 billion ($465.7b) of Chinese imports. The ministry of finance said: "China will have to take the necessary countermeasures."
The debt of highly rated sovereign borrowers such as the US, Germany and Switzerland has rallied particularly strongly, a sign of its status as a shelter during times of uncertainty. The Barclays index tracking such bonds has generated returns, including price rises and interest payments, of around 7 per cent this year, leaving it on track for the second-best performance in the decade since the financial crisis.
The yield on that index has now fallen to 0.71 per cent, from above 1.6 per cent last autumn, in a sign of the high price money managers must now pay for the security of sovereign bonds.
The extension of the bond rally drove the stock of global negative-yielding debt to above US$16 trillion on Wednesday for the first time, having exceeded the US$15t threshold just 10 days ago. At the end of last year, the market value of bonds with yields of less than zero — for which investors are assured a loss if they hold them to maturity — was about US$8t.
Asian stock markets tumbled overnight, catching up with the sharp retreat on Wall Street that saw stocks sink by about 3 per cent. Japan's Topix was down 1 per cent, while the S&P/ASX 200 in Australia fell 2.9 per cent.
- Additional reporting by Naomi Rovnick and Hudson Lockett
Written by: Philip Georgiadis, Adam Samson, Matthew Rocco and Alice Woodhouse
© Financial Times