After almost three years of successfully predicting a global economic revival, world bond markets are furiously flagging the risk of yet another recession, as well as low inflation for a generation. Spooked by the escalating U.S.-China trade war, long-term interest rates embedded in government bond markets – widely seen as the most accurate predictors of future economic activity and inflation – have relapsed into deep troughs.
U.S. Treasury yields have plunged 50 basis points in seven weeks, while sub-zero German 10-year bond yields are at record lows. In Japan, Britain, Switzerland and France, borrowing costs are at their lowest since 2016 – when financial markets were hit by a combination of blows including Britain’s shock decision to leave the European Union and an economic slowdown in China.
Recession is not a given. Bond markets may be pointing that way but some other indicators, such as equity markets, are not as bearish. However trade tensions, also including a recent U.S. plan to impose tariffs on Mexico, may be what’s making the present slide in bond yields different. “We have to pay attention,” said Franck Dixmier, global head of fixed income for Allianz Global, which manages more than $560 billion in assets.
“We know from experience that bond markets are quite good at predicting future economic developments and what’s being priced in more and more is the consequence of a clear escalation of trade tensions.”
Expectations for future inflation globally have tumbled as a result of fears about slowing growth, or recession, at a time when major central banks have limited ammunition following years of ultra-easy monetary policy. Britain is an exception because of Brexit.