US government debt rallies again as investors see economic recovery slowing

US government bonds rallied, the dollar firmed and equities wavered as investors positioned themselves for a slowdown in the booming pace of economic growth.

The yield on the benchmark 10-year US Treasury note fell 0.07 percentage points at one point on Wednesday to a four-month low before retracing slightly to settle around 1.32 per cent. Germany’s equivalent Bund yield dropped 0.03 percentage points to minus 0.301 per cent, its lowest since early April.

Fears the Federal Reserve would respond to a speedy US recovery and surging inflation with a rapid round of rate rises sent the yield on the 10-year note up to almost 1.8 per cent in March.

But such jitters have been replaced by expectations that US gross domestic product growth, which is expected to have reached an annualised rate of at least 9 per cent in the second quarter, was about to peak, analysts said.

Data from the Institute for Supply Management on Tuesday also showed US service sector activity declined in June from the previous month.

“Bond markets are expressing a view that we are approaching the slowdown phase of the economic cycle,” said Gergely Majoros, portfolio manager at Carmignac.

In US stock markets, the S&P 500 closed up 0.3 per cent and the technology-focused Nasdaq Composite was flat. Both share indices remained close to record highs. The Stoxx Europe 600 rose 0.8 per cent, close to the record it hit last month.

The dollar index, which measures the greenback against major currencies, was up 0.3 per cent at one point in the day to its highest level since early April. The euro fell 0.2 per cent to $1.18.

The intensifying spread of the Delta variant of coronavirus had stymied the “gangbusters narrative” that had dominated markets for most of 2021, said Deutsche Bank strategist George Saravelos.

Since drugmakers announced effective coronavirus vaccines in November last year and Joe Biden unleashed trillions of dollars of stimulus after being elected US president, financial markets had been supported by “an unprecedented mix of procyclical fiscal and monetary policy just as the economy was taking off”, Saravelos said.

But growth now had to “be much more reliant on private rather than public sector spending”, he said.

On Wednesday the Fed published minutes of its June meeting, when officials brought forward projections for the first post-pandemic US interest rate rise by a year to 2023. Officials engaged in a fierce debate about whether the US economy was on firm enough footing for the central bank to begin considering a reduction of its $120bn a month of emergency debt purchases.

“Presumably, the bond market believes that the Fed is unlikely to raise rates anywhere close to the peak of the last cycle,” Jefferies strategist Sean Darby said, “as structural forces” such as high public and corporate debt “keep the Fed close to the zero bound”.

Elsewhere in markets, Brent crude dropped 2 per cent to $73.25 a barrel, following a fall of 3.4 per cent on Tuesday. This came after talks between members of the Opec+ group of producer nations ended without any agreement about winding up Covid-19 supply curbs.

“If the current stand-off continues, compliance with [the] production quota will eventually deteriorate,” analysts at Morgan Stanley said. “Much of Opec’s spare capacity could come to the market quickly.”

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