Investors are anticipating a fresh wave of stimulus measures to tackle flagging growth, as the White House said it was considering a new round of tax cuts to boost the economy.
Central bankers will gather at their annual Jackson Hole meeting in Wyoming on Thursday as warning signals from financial markets add to rising pressure to come up with ways to support the global economy.
The US yield curve — which reflects market expectations of future interest rates — last week inverted for the first time since the summer of 2007, a move seen by many as a leading market indicator of recession.
Weak data from various countries, including Germany and China, have fuelled fears that the global economy is running out of steam.
Concerns over the economy have sent investors fleeing into the perceived safety of government bonds, driving yields down to record lows — the 30-year US Treasury yield fell below 2 per cent for the first time last week — boosting the pile of debt that offers a negative rate of interest over $16tn. In Europe, several countries have no sovereign debt trading with positive yields.
“There’s a risk that you will never get a positive yield on a safe asset again — so buy them now while stocks last,” said Gareth Colesmith, head of global rates at Insight Investment.
Investors poured almost $500bn into fixed income mutual funds in the first half of this year, according to Morningstar, the fastest rate for at least a decade.
As a result, the price of highly-rated countries’ debt has jumped by an average of 6.4 per cent so far this year, putting this year on track for the strongest rally for the asset class since 1995, according to ICE BofA Merrill Lynch bond indices.
“Markets have an insatiable appetite for easing,” said Nicola Mai, a London-based portfolio manager at Pimco. “No matter what central banks do, they want more.”
Ratings agency S&P Global warned last week it was on “high alert” over the US economy and now sees a roughly one-in-three chance the world’s biggest market will fall into recession in the next year.
However, Larry Kudlow, White House economic adviser, insisted that the US economy was “in pretty good shape”, telling Fox News: “I don’t see a recession at all.”
Mr Kudlow added that the Trump administration was “looking at” the possibility of tax cuts, perhaps funded by money collected from tariffs on Chinese goods.
Central banks have already begun taking action in response to the gathering economic storm clouds; more than a third of central banks have eased in the last six months, the most abrupt shift since 2009, according to Fitch Ratings.
But with interest rates around the world already at or near record lows and many central banks either still running post-crisis stimulus programmes or signalling that they are about to restart stimulus efforts, some economists argue that their options are severely limited.
James Stock, a political economist at Harvard university, said the US Federal Reserve would typically respond to a recession with five percentage points of rate cuts. But this time around “we don’t have five percentage points”, he said.
Additional reporting by Lauren Fedor and Robin Wigglesworth