As recession concerns overshadow inflation, investors are turning to bonds for safety, highlighting fixed income’s resilience amid recent market turmoil.
Last week’s equity sell-off saw US Treasuries and other high-rated debt rally, driving yields to their lowest in over a year.
Although some gains were later reversed, the movement underscored bonds’ appeal in a slowing growth environment.
With inflation cooling and the Federal Reserve—along with other central banks—expected to deliver multiple interest rate cuts by year-end, the case for bonds is stronger than ever.
The numbers are telling: Investors poured $8.9 billion into US government and corporate bond funds in August, adding to July’s $57.4 billion inflow—the highest since January and the second-largest since mid-2021, according to EPFR.
High-grade corporate debt has seen ten consecutive weeks of positive inflows, marking the longest streak in four years.
“US Treasuries are the best protection against a recession scenario,” said Robert Tipp, head of global bonds at PGIM Fixed Income.
“The arguments for fixed income are compelling. Sometimes people need a push to move out of cash, and the drop in employment has provided just that,” Tipp added.
A Bloomberg index tracking both US government and high-quality corporate bonds has risen 2% since late July, a stark contrast to the S&P 500’s 6% loss.
The most significant bond rally came on the day of the employment report when stocks tumbled.
Expectations for Fed rate cuts have shifted dramatically since the weak US jobs report in early August, which saw the jobless rate increase to 4.3% in July from 4.1% in June.
The report also revealed fewer-than-expected job additions, leading traders to now expect more than a full percentage point in rate cuts by year-end—an outcome that seemed unlikely just weeks ago.
Rick Rieder, Chief Investment Officer of Global Fixed Income at BlackRock, noted that bonds now offer high yields without the looming threat of further Fed rate hikes.
“People don’t like losing money in fixed income,” Rieder explained. “But today, you can feel confident that the Fed won’t raise rates again.
The yields and returns in fixed income right now are so attractive that I expect even more money to flow into bonds.”
While corporate debt wasn’t immune to last week’s market sell-off, its impact was softer compared to equities, particularly in high-quality investment-grade credit.
Even “junk” bonds held up better than stocks, which have been hit hard, especially in the tech sector.
A Bloomberg index of US high-yield debt dipped just 0.6% during last Monday’s global sell-off in risky assets, while the S&P 500 dropped 3%.
“Credit has held up well against the volatility in equities,” said Dan Ivascyn, Chief Investment Officer at Pimco.
“We’re not overly aggressive, but the recent widening in high-yield corporate bond spreads is something we’re watching closely.”
Despite the influx into bonds, some market players remain wary of how an economic slowdown might impact corporate credit.
Ashok Bhatia, Co-Chief Investment Officer of Fixed Income at Neuberger Berman, cautioned, “The risk for credit is if we see weaker employment and growth data.”
The inflation outlook will be crucial as markets have already priced in significant rate cuts.
Data expected this week is likely to show a slight decline in US consumer inflation to an annual rate of 2.9% in July.
However, any unexpected rise could dampen hopes for rate cuts and negatively impact bonds.
“I think bonds are back,” Bhatia concluded. “But for credit to hold at these levels, we need the Fed to act quickly and lower the policy rate if economic weakness persists. Anything suggesting otherwise could be problematic for credit.”
In the business world, the evolving economic landscape continues to test investors’ strategies, with bonds emerging as a favored haven.
You May Also Like:
