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Treasuries on track for best month since 2015 amid investor gloom

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US Treasuries are on track for their biggest monthly rally in more than four years as bond markets have sounded a recession warning, with rating agency S&P warning investors it is on “high alert” for the US economy.

Stocks and government bonds steadied on Friday after a volatile week of trading driven by a cocktail of mounting and connected risks centred on the impact of the US-China trade dispute on global growth.

A new report from S&P said the risk of a US recession in the next 12 months had increased to 35-35 per cent, up from the 25-30 per cent previously.

“Unpredictability on the trade front and deteriorating global backdrop (led by industrial weakness) are the key reasons for high alert,” the agency said.

Investors have largely shunned risk assets and moved into havens, a trade which has sent the yield on government bonds from Germany to New Zealand tumbling, as investors have moved into the debt.

The yield on the benchmark US 10-year Treasury note has fallen by 46 basis points so far this month, leaving it on track for its biggest decline since January 2015, according to Bloomberg data.

The 10-year yield nudged 3 bps higher on Friday morning, while European markets opened higher after a largely positive session in Asia. The Stoxx Europe 600 rose 0.7 per cent in early trading, while futures on Wall Street pointed to similar gains for the S&P 500 at the open.

Earlier this week, poor economic data from two trade-exposed economies, China and Germany, sent yields of US and UK 10-year government bonds below those of shorter-maturity debt for the first time since the financial crisis — an inversion of their normal relationship that has historically been a harbinger of recession.

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Typically, longer-term debt trades with higher yields to compensate investors for the risk of holding debt for a longer time. When the yield curve flips, it is generally seen as a strong signal that investors are expecting an economic downturn.

US President Donald Trump was upbeat on the trade situation in remarks to reporters on Thursday, and said he had a call scheduled with his Chinese counterpart, adding that Beijing “would like to do something”, without giving further details.

Kit Juckes, Société Générale strategist, said: “The news that presidents Trump and XI will meet ‘soon’ has had a soothing effect on markets overnight.”

Hong Kong’s Hang Seng index gained 0.9 per cent, with the city’s battered property stocks among those posting the strongest gains. China’s CSI 300 of Shanghai and Shenzhen-listed names rose 0.4 per cent, while Japan’s Topix rose 0.1 per cent.

The S&P 500 closed 0.3 per cent higher on Thursday after stronger than expected retail sales helped to offset a bit of the trade gloom.

Brent crude, the international oil marker, added 1 per cent after selling off overnight, trading at $58.55 a barrel. Gold, viewed by some investors as a haven, gave up 0.5 per cent.

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Via Financial Times

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