Government bonds rally as weak business surveys darken outlook

Government debt prices rallied sharply on Friday while Wall Street stocks dropped after disappointing business surveys on both sides of the Atlantic intensified investor fears about the global economic outlook.

The yield on the benchmark 10-year Treasury note fell 0.14 percentage points to 2.77 per cent after a closely watched survey signalled a contraction in business activity in July. Yields fall when prices rise.

S&P Global’s composite purchasing managers’ index fell from 52.3 in June to 47.5 in July, falling below the 50 level that indicates expansion for the first time since June 2020.

The decline was driven by particularly weak reports from respondents in the services sector, and heightened concerns that the Federal Reserve’s efforts to fight inflation by aggressively rising interest rates are pushing the US economy toward recession.

“The Fed has made it very clear that price stability is their number one goal and they almost have to target recession in order to bring down inflation,” said Seema Shah, chief strategist at Principal Global Investors.

The result also knocked equities, with the S&P 500 index of blue-chip stocks falling 0.9 per cent.

The tech-heavy Nasdaq Composite index slid 1.9 per cent as Snap became the latest tech name to report it was suffering from the tough macroeconomic environment. Shares in the group tumbled 39.1 per cent after it posted a $422mn quarterly loss and reported a slump in advertising demand.

Google and Microsoft have also said they are reassessing their investment priorities in recent weeks, while investment bank Goldman Sachs warned of job cuts this week.

Eurozone bond markets also reflected economic concerns after the equivalent PMI survey for the currency bloc fell to a 17-month low of 49.4, worse than economists had forecast.

The yield on Germany’s 10-year Bund dropped 0.17 percentage points to 0.97 per cent, according to Tradeweb data, while the two-year yield that closely tracks interest rate expectations tumbled 0.22 percentage points to 0.40 per cent.

“There are multiple shocks hitting the eurozone economy,” said Hetal Mehta, senior European economist at Legal & General Investment Management. “A recession is likely at the turn of the year.”

Despite the signs of worry in the bond market, Europe’s Stoxx 600 stock index ticked up 0.3 per cent.