Traders Return to Haven Playbook as Recession Risk Boosts Bonds

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(Bloomberg) — Traders are piling back into government bonds and currency havens as concerns mount over the prospect of a recession.

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European bonds and Treasuries both surged to snap two days of losses, with two-year U.S. yields falling as much as 10 basis points. The revival of haven demand also drove money flows into the dollar and the yen, helping the Japanese currency recover from a fresh 24-year-low hit against the greenback earlier in the session.

The market turbulence comes as economists warn that the world economy is at risk of slipping into a recession as central banks remain on course to deliver aggressive hiking cycles despite the risks to growth. Traders will next be watching for any sign that Jerome Powell is wavering in his resolve to continue Federal Reserve tightening.

“The market is focusing on recession risks for now, with oil falling, yields lower, risk assets getting hurt,” said Peter McCallum, rates strategist at Mizuho International Plc. He expects Powell, testifying to a Senate committee later Wednesday, to clarify last week’s historic three-quarter-point hike was in reaction to inflationary pressures with the aim of achieving a neutral rate quickly.

In the UK, traders are already betting recession fears will limit the amount that the Bank of England can lift borrowing costs. Gilts rallied as inflation data for May met estimates and money markets pared bets on three consecutive 50 basis-point BOE hikes. Two-year bond yields, the most sensitive to monetary policy, fell 18 basis points.

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