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Global Bond Yields Fall to Two-Year Low as Slowdown Fears Grow

(Bloomberg)

(Bloomberg) -- Global bond yields slid to a two-year low this week due to concern over slowing growth in major economies and increasing expectations for interest-rate cuts.         

The average yield on a broad gauge of investment-grade government and corporate debt has fallen to 3.3%, the least since September 2022, according to the Bloomberg Global Aggregate Total Return Index. Sentiment over the world’s growth outlook deteriorated further this week as oil slumped and deflation fears intensified in China.

“Concerns that China and now the US economy could be tipping into recession are driving this decline in global bond yields,” said Prashant Newnaha, a senior Asia Pacific rates strategist at TD Securities in Singapore. “The sharp drop in oil prices is adding to the debate that global economic activity is slowing sharply.”

Traders are awaiting a key gauge of US inflation due Wednesday for clues on how much the Federal Reserve will cut rates in coming months. Other central banks have already started to ease, with markets anticipating the European Central Bank will reduce its benchmark again on Thursday to bolster faltering growth.

US hiring fell short of economists’ forecasts in August, adding to bets on the size and speed of possible Fed rate cuts. Traders in US interest-rate options are still pricing in at least one supersized 50 basis-point reduction this year, and 150 basis points of easing by the end of January.

“The focus has totally shifted away from inflation onto employment,” Alexandre Drabowicz, chief investment officer at Indosuez Wealth Management, said in a Bloomberg Television interview. “We have ourselves a soft-landing scenario” for the US economy, he said. 

The view the US economy is slowing but not headed for a recession is helping support demand for a deluge of high-grade debt sales in the US this month. Borrowers around the world have priced almost $104 billion of the notes so far in September as they seek to lock in lower funding costs, data compiled by Bloomberg show. 

Investment-grade corporate bonds globally have returned about 4.7% so far this year, compared with 1.9% for investment-grade government debt, the data show.           

(Updates with investor comment and chart)

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