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Traders Return to Haven Playbook as Recession Risk Boosts Bonds

Economists warn that the world economy is at risk of slipping into a recession.

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

European bonds and Treasuries both surged to snap two days of losses, with 10-year US yields falling as much as 14 basis points to 3.13% as rates declined across the curve. Debt markets largely maintained their gains even as Federal Reserve boss Jerome Powell -- in written remarks released before verbal testimony to Congress -- reiterated the central bank’s determination to bring spiraling inflation back to the official target of 2%. The German 10-year rate briefly hit 1.59%, a mark last seen on June 15, the day of the last Fed policy decision.

The revival of haven demand also drove money flows into the yen, helping the Japanese currency recover from a fresh 24-year-low hit against the greenback earlier in the session. The dollar was mixed of its Group-of-10 peers, gaining against commodity currencies but lower against the euro, yen and pound.

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. 

“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.

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, at one stage fell more than 21 basis points.

--With assistance from James Hirai.

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