Global bonds switch to rally mode as recession fears intensify

The gains for the long end overnight were also fueled by a strong US$17 billion sale of 20-year bonds. PHOTO: AFP

NEW YORK (BLOOMBERG) - A global bond rally extended into Thursday (May 19) as investors hunted for havens amid a risk-asset rout on concerns a United States recession is becoming more likely.

Benchmark Australian yields tumbled 13 basis points to 3.33 per cent, following a sharp drop overnight in their Treasury equivalents.

The 10-year Treasury yield slid about 10 basis points to 2.88 per cent as the S&P 500 slumped 4 per cent, its worst day since June 2020.

Normally, when interest rates are rising, bonds become less attractive causing their prices to fall.

But with the US Federal Reserve focused on taming inflation via rate hikes, thus raising the risk of a recession, bond managers have been adding long-dated Treasuries to their portfolio as a form of insurance should risk assets fall further.

"Having duration as a hedge in a portfolio is becoming more important as the risk of a slowdown in the economy is likely," said Western Asset Management portfolio manager Mark Lindbloom.

This year's rapid climb in Treasury yields means "bonds are back to being attractive relative to other asset classes", he noted.

The policy-sensitive two-year note's yield declined only 3 basis points to 2.67 per cent, further narrowing the gap between short- and longer-dated Treasuries.

The difference between five- and 10-year yields fell below zero after a short-lived spike to 11 basis points last week from a prior period of inversion.

Fed chair Jerome Powell on Tuesday said the central bank was prepared to raise the policy rate above neutral if inflation does not moderate in a clear and convincing way, which could entail pain for the economy through a rise in the unemployment rate.

The gains for the long end overnight were also fueled by a strong US$17 billion (S$23.6 billion) sale of 20-year bonds. The auction drew a yield of 3.290 per cent, the highest since the 20-year tenor was revived in May 2020, but below a pre-auction indicated level of 3.292 per cent, signalling dealers underestimated demand.

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