A sharp rally in government bonds set fresh records on Thursday, with the yield on 30-year US government bonds falling below 2 per cent for the first time as investors sought safety amid growing fears over the global economy.

Traders have dumped riskier assets such as stocks and crude oil and moved into perceived “havens”, including bonds, sending their yields lower. On Wednesday a closely watched metric in the US government bond market turned negative, raising new recession concerns. That indicator, the yield curve, remained inverted in Thursday morning trading in London.

In a new sign of the flight into bonds, the 30-year US Treasury bond yield dropped 5 basis points to 1.9776 per cent, its lowest level on records that go back to the 1970s and the first time it has fallen below 2 per cent. Shorter-dated US government bonds also rallied as investors moved into the debt, sending yields lower.

“For me yesterday’s . . . inversion is the one that worries me most. In my opinion, it has the best track record for predicting an upcoming recession over more cycles than any of the others,” said Deutsche Bank strategist Jim Reid.

“We think the causality is through animal spirits. In an inverted yield curve environment, this gets increasingly drained and thus impacts financial and economic activity. So I really don’t care why the curve inverts, just that it does.”

The debt of highly rated sovereign borrowers such as the US, Germany and Switzerland has rallied particularly strongly given its status as a shelter during times of economic uncertainty. The Barclays index tracking such bonds has generated returns, including price rises and interest payments, of 7.1 per cent this year, leaving it on track for the second-best performance in the decade since the 2008-09 financial crisis.

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The yield on that index has now fallen to just 0.71 per cent, from above 1.6 per cent last autumn, in a sign of the high price money managers must now pay for the security of sovereign bonds.

The extension of the recent rally drove the stock of global negative-yielding debt to above $16tn on Wednesday for the first time, having just exceeded the $15tn threshold 10 days ago. At the end of last year, the market value of bonds with yields of less than zero — for which investors are assured a loss if they hold them to maturity — was about $8tn.

European equities stabilised on Thursday after the broad Stoxx 600 index dropped 1.7 per cent in the previous session. US markets were also set to stabilise — with S&P 500 futures up 0.8 per cent — following a bruising sell-off sparked by rising anxieties that the moves in the bond markets show the chances of a recession are mounting.

Asian stock markets tumbled, catching up with the sharp retreat on Wall Street that saw stocks sink by about 3 per cent. Japan’s Topix was down 1 per cent, while the S&P/ASX 200 in Australia fell 2.9 per cent.

Oil continued its recent slump with Brent, the international oil marker, receding 0.3 per cent to just over $59 a barrel.

Gold, a haven asset, consolidated recent gains and was flat at $1,515 per troy ounce.

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Via Financial Times