Bond Watch: US economy scare boosts bonds

Welcome to interactive investor’s ‘Bond Watch’ series, covering the latest market and economic news – as well as analysis – that is relevant to bond investors.          

Our goal is to make the notoriously complicated world of bond investing simpler, by analysing the week’s most important news and distilling it into a short, useful and accessible article for DIY investors.             

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Bonds rally as shares fall

Bonds proved their worth over the past week, rising in value as stock markets fell.

Stocks are wobbling due to signs that the US economy could be slowing and there may be a recession coming. Coupled with disappointing earnings from many large technology firms, investors are taking the opportunity to take profits. 

This sparked a sell-off in equity markets, with the MSCI World index dropping about 5% over the past week.  

However, bond markets reacted positively to the prospect of a slowing economy, and therefore the prospect of lower interest rates.

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Now that inflation is back at target, this gives central banks more freedom to cut interest rates, as it is less likely that they will impact inflation. 

Gilt yields have dropped, with the five-year yield falling from 3.9% to 3.6% from the end of July to 2 August, and the 10-year yield falling from 4.1% to 3.8%, before giving up some of the gains. Yields fall when bond prices rise.

Should we be worried about a slowing US economy?

One of the triggers of the stock market drop was a weak US jobs report, showing that unemployment increased to 4.25% in July, and job creation slowed.

However, Tiffany Wilding, an economist at fund group PIMCO, argues that while the US economy is slowing, it is not crashing.

She says: “While the headline numbers were weaker than expected, and certainty reflect an economy that is slowing, there were some caveats in the details, which continue to paint a picture of a slowing, but not yet crashing, economy.”

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One of the reasons is the impact of Hurricane Beryl in Texas, which meant that 436,000 people could not work due to bad weather, and seasonal factors to fully adjust for seasonal hiring also likely contributed to the noise.

Her view is that the economic data solidifies a September US Federal Reserve rate cut, and raises the chance that the Fed revises its forecast to signal a faster pace of cuts ahead.