Bonds Can’t Seem to Shake That Sinking Feeling

It’s been a rough few weeks for the global government bond market. Yields as measured by the Bloomberg Barclays Global Aggregate Treasuries Index have risen from this year’s low of 1.15 percent in late March to 1.27 percent on Tuesday. The rise came as investors embraced a new narrative, which is that perhaps the global economic outlook isn’t as bad as thought earlier in the year. As a result, investors doubled down on riskier assets, pushing the S&P 500 Index to a record on Tuesday and equities globally to within 1 percent of an all-time high. But on Wednesday, the bond market made clear that it’s too soon to sound the all-clear.

In a sign of just how pessimistic the bond market is on the economic outlook, government bonds globally rallied unusually hard after a small miss in a second-tier German economic report on business sentiment, with yields on that nation’s 10-year bonds dropping back below zero. Bond yields throughout the euro zone fell as well. In the U.S., 10-year yields declined the most in a month, and the Treasury Department’s auction of $41 billion in five-year notes generated above-average demand. “There is still this underlying sense of eternal pessimism in the market,” Thomas Simons, senior money markets economist at Jefferies LLC, told Bloomberg News. “Any time there’s even a sniff of a recession sign, it’s latched onto as the base-case scenario.” That’s not to say other factors didn’t contribute to the rally in bonds. It helped that a report in Australia showed inflation slowed sharply in the first three months of the year, reinforcing the notion that consumer prices are in check globally. Then there’s the Bank of Canada, long considered the most hawkish major central bank in the world. On Wednesday, it dropped its long-held bias for more interest-rate increases, in part citing a global slowdown. The move was a mild surprise given how energy prices have rebounded in what should be a net benefit to Canada’s largely oil-dependent economy.