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Global bonds rise in best month since 2020 on recession fears

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(Bloomberg) — Inflation is so for the first half of the year, at least as far as bond investors are concerned.

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Global bonds are on track for their biggest monthly gain since November 2020 – the Bloomberg index rose 1.8% – as the market’s focus shifts to fears of a recession amid the Federal Reserve’s rapid interest rate hikes. This is a far cry from the previous six months, when the strongest inflation in a generation resulted in a combined loss of 14%.

Federal Reserve Chairman Jerome Powell’s signal on Wednesday that tightening may slow depending on economic data only added to the rebound. A report released the next day showing that the US economy shrank in the second quarter seemed to all but confirm a global contraction as the new baseline for investors, which is expected to halt the upward trend in consumer prices.

“History tells us that recessions tend to lower inflation,” strategists at Societe Generale SA, including Subhadra Rajapa in New York, wrote in a report. “Global bonds staged an impressive rally as a dovish Fed and weaker data continued to stoke recession fears. Markets quickly priced in Fed and European Central Bank rate hikes next year, relying on higher rates and demand-killing to keep inflation at bay.”

Australian government and corporate bonds rose 2.4% in July, the biggest monthly gain since May 2012. That doesn’t even include Friday’s gains after U.S. gross domestic product data sent 10-year Treasury yields lower. as many as 18 basic quantities. The index fell 9.5% in the first half of the year, with losses exacerbated by a series of central bank policy missteps.

Globally, corporate bonds are among the leading advances. The index, which tracks the euro-denominated debt of investment-grade companies, returned 4.7% in July, marking a record monthly gain. U.S.-denominated debt from highly-rated emerging Asian issuers is on track for its best month since November 2020.

However, some analysts and investment strategists warn that the rally in high-yielding corporate bonds could soon fizzle out due to the risk of recession in some major economies, the ongoing crisis in China’s credit market and rising default risks.

Not everyone is convinced that the rebound will continue.

“I can’t help but think this is the start of a bailout rally rather than the start of some rate reversal,” said Sky Masters, head of fixed income research at National Australia Bank Ltd. in Sydney. “The risk to the market is that the Fed will not begin to ease policy as quickly as expected and inflation remains high.

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