Global yields drop from multi-year highs as recession fears grow

GOVERNMENT bonds extended a global rally as swirling concern that Federal Reserve interest-rate hikes will push the US into recession sent investors scurrying for the safety of sovereign debt.

US 10-year yields slipped as much as 3 basis points to 3.13 per cent in early Asian trading after tumbling by 12 basis points on Wednesday (Jun 22) when traders cut back bets on the size of Federal Reserve interest-rate hikes. Yields had jumped to 3.50 per cent last week, the highest since April 2011.

Australia's benchmark 10-year yield slipped 16 basis points to 3.83 per cent, while similar-maturity New Zealand yields fell 18 basis points to 3.98 per cent. Japan's 10-year bonds futures jumped 0.29 to 148.15.

The combination of growing recession fears and the highest nominal yields for a decade or more are luring investors back to global bonds after sizzling inflation fuelled a record rout. Pacific Investment Management this week joined those signalling the worst may be over for bonds, saying the surge in Treasury yields is "restoring value", especially with the likelihood of an economic contraction increasing.

"Markets are now beginning to bet that recessionary risks may actually trump inflation risks and this is driving the drop in front-end yields," said Prashant Newnaha, a rates strategist for TD Securities in Singapore. "Even as central bank officials reiterate that the chances of recession aren't particularly elevated, there's an acknowledgement that engineering a soft landing will be very challenging."

Gains in Treasuries this week are being led by shorter-end notes as traders start to price in a reversal in central-bank rate hikes on speculation the economy will soon slow down rapidly. Fed chair Jerome Powell added to those fears Wednesday when he said steep rate hikes tip the US economy into recession, calling a soft landing "very challenging".

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Australian bonds have surged this week as central bank governor Philip Lowe pushed back against bets he would accelerate rate hikes and economists lowered their outlook for the economy. Aussie 10-year yields have fallen 29 basis points this week, heading for the biggest weekly decline since September 2012.

"Powell has said he has an unconditional commitment to fighting inflation," said Emily Roland, co-chief investment strategist at John Hancock Investment Management in Boston. "The key is how much are they willing to see economic growth deteriorate in that commitment."

US stocks are heading for their worst first-half losses since the 1970s, which is also helping to revive Treasuries and other government debt as a haven. BLOOMBERG