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Bond Report: Bond yields slide amid waning risk appetite and global growth fretting

Bond yields fell on Monday, as traders sought the safety of Treasuries amid revived concerns about prospects for the global economy.

The fall in benchmark yields snaps a three-day run of rising borrowing costs.

What’s happening
  • The yield on the 2-year Treasury TMUBMUSD02Y, 3.078% slipped 4.2 basis points to 3.078%. Yields move in the opposite direction to prices.
  • The yield on the 10-year Treasury TMUBMUSD10Y, 3.065% retreated 3.6 basis points to 3.065%.
  • The yield on the 30-year Treasury TMUBMUSD30Y, 3.238% fell 3.4 basis points to 3.236%.
What’s driving markets

A reduction in broader market risk appetite is encouraging investors to seek government bonds. This follows news that China is battling a new COVID-19 strain, which has raised fears that the world’s second biggest economy will take another hit to growth.

The U.S. 10-year to 2-year spread of minus 1.3 basis points means the yield curve remains inverted, potentially signalling a looming economic downturn.

Yields had crept higher towards the end of last week, helped by a stronger than expected U.S. jobs report which bolstered expectations that the Federal Reserve can afford to keep hiking interest rates to damp down inflation.

“Although incoming economic data points to less momentum in the economy, the labor market remains tight across a number of metrics, and employment gains remain unsustainably high in light of inflationary pressures,” said Stephen Juneau, U.S. economist at Bank of America.

“The Fed views the primary path to restoring price stability via a moderation in aggregate demand. In turn, this means cooling off a tight labor market. Hence, in our view, solid gains in June employment point to another large increase in the federal funds rate at the July FOMC meeting,” he added.

Markets are pricing in a 93% probability that the Fed will raise interest rates by another 75 basis points to a range of 2.25% to 2.5% after its meeting on July 27. The central bank is expected to take its borrowing costs to 3.5% by April 2023, according to Fed Funds futures.

Key to this expectations will be the U.S. consumer prices inflation data, due for release on Wednesday. The June CPI is forecast to rise year-over-year to 8.8% from 8.6% in May.

In Europe, the cautious mood was also prevalent. The 10-year German Bund TMBMKDE-10Y, 1.305% yield dipped 4.2 basis points to 1.305% and the 10-year U.K. Gilt TMBMKGB-10Y, 2.205% eased 2.8 basis points to 2.209%.

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