(Bloomberg) -- Government bonds staged a sweeping rally on Thursday, with US Treasuries gaining momentum as a growing sense of angst over the health of the global economy pummels stock markets.
Treasuries gained for a second day as investors sought out the safest debt, driving the 10-year yield down 11 basis points to 2.77%, it’s lowest level since late April. Weaker than forecast US jobless claims and a sharp decline in a regional Philadelphia Fed survey spurred a burst of buying in Treasuries, with equities futures indicating that stock prices will open lower.
German 10-year bund yields retreated 10 basis points back below 1%, while in a sign of nervousness, the spread between 10-year notes and their swap counterparts rose the most in almost two weeks. Italian bond prices also climbed.
The moves add credence to the view that the worst of the sovereign bond rout may be over, at least for now, as concerns over the economic outlook vie with hawkish central bank rhetoric. Evidence that demand from US consumers isn’t as strong as people thought is stoking fears about lower corporate profits.
“We are really starting to see a clearer negative correlation between bond prices and equities,” said Adam Kurpiel, head of rates strategy at Societe Generale SA.
European shares tumbled and S&P 500 futures slid around 1%, signaling another red day for stocks. Credit markets are also sounding an alarm on rising recession risks, with the price of insuring against default of junk-rated bonds in Europe touching a two-year high.
JPMorgan Asset Management has joined growing chorus of investors who reckon there could finally be some respite for bondholders, who have suffered seismic losses this year. The 10-year Treasury yield has fallen nearly half a percentage point since touching as much as 3.20% on May 9, its highest level in more than three years.
To be sure, greater stability in bond markets is likely still some way off. Uncertainty about the impact of aggressive Federal Reserve tightening is whipsawing yields, with the year shaping up as the most volatile for Treasuries in over a decade.
Read more: Treasuries Whiplashed Like 2009 as Fed Hawks Unleash Uncertainty
Still, the stock and bond moves are “a sign that markets are more confident in central banks’ ability to quash inflation eventually,” said Antoine Bouvet, rates strategist at ING Bank NV.
“For the same reason, we’re also seeing curves flatten,” he added. “It is far too early for central banks to tone down their hawkish rhetoric so front-end bonds cannot rally as much as the long-end.”
Money market bets on rate hikes by the European Central Bank were broadly unchanged, pricing 35 basis points of tightening by July. ECB Vice President Luis de Guindos and fellow policy maker Robert Holzmann are due to speak later, potentially offering further insight into the path for interest rates.
(Updates throughout.)
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