US economic concerns trigger a flight to safety, with global bond markets regaining lost ground for the year

According to the Zhitong Finance and Economics APP, due to increasing concerns about the US economic outlook, investors are seeking safe havens, leading to a rebound in the global bond market, which has erased losses for the year. The Bloomberg Global Sovereign and Corporate Debt Index has risen by 1% since mid-April after a 4.6% decline, with a significant 2.3% surge last week. Last Friday, US monthly employment data showed a slowdown in hiring, with the unemployment rate reaching a three-year high, further driving the bond market rally.

Winson Phoon, Head of Fixed Income Research at Malayan Banking Berhad Securities Private Limited in Singapore, pointed out that the rise in US Treasury bonds has lifted the entire market, with Japanese government bonds also seeing gains despite US-Japan policy differences. He emphasized, "The market is overly complacent about risk assets, and the recent soft US employment data is undoubtedly a timely warning signal."

In response to the weaker-than-expected US employment report, the yield on the 10-year US Treasury fell by 19 basis points during the New York trading session and further dropped by 7 basis points during the Asian trading session. The yield on the Japanese 10-year government bond decreased by 17 basis points, while New Zealand's bonds with similar maturity saw a 6 basis points decline. Although Australia's cash bond market was closed for the holiday, its three-year futures prices surged to the highest level since June 2023.

Prashant Newnaha, Senior Interest Rate Strategist at TD Securities in Singapore, stated that the turmoil in the Japanese stock market has sparked a new round of interest in global fixed income assets, expecting significant volatility but further room for decline in US yields.

A series of weak economic data has increased traders' expectations of the Fed easing monetary policy. The US overnight index swap market currently expects a rate cut of over 100 basis points by the end of the year, compared to just 25 basis points a week ago. Economists at Citi and JPMorgan predict that the Fed will cut rates by 50 basis points at the September and November meetings.

Economists at Goldman Sachs have raised the probability of a US economic recession in the next year from 15% to 25%, but they also note that due to the overall strong economic performance, absence of major financial imbalances, and ample room for rate cuts by the Fed, swift action can be taken if necessary.

Futures market traders anticipate that the Fed will cut rates five times by the end of the year, implying exceptionally large half-percentage point cuts at the past three meetings. Since the pandemic or credit crisis, the Fed has not implemented such a large-scale rate cut.

The rise in US Treasury yields has pushed the benchmark 10-year bond yield down to around 3.8%, the lowest level since December, which is considered a key indicator of borrowing costs across markets Kathryn Kaminski, Chief Research Strategist and Portfolio Manager at AlphaSimplex Group, stated that due to the lackluster performance of the stock market and investors rushing to buy bonds before further yield declines, the bond market seems to have room for further upside. She mentioned that the company's trend-following signals have shifted from bearish to bullish this month.

Kaminski predicted, "People are looking to lock in rates, which will create significant buying pressure, and with the strengthening risk aversion sentiment, if the Fed cuts rates before the end of the year, the 10-year bond yield could drop to near 3%."

Overall, the current rally in the global bond market reflects investors' concerns about economic prospects and their pursuit of safe-haven assets, while also highlighting the market's sensitive response to central bank monetary policy trends