Recession-Fueled Bond Rebound Faces Stern Tests Ahead

Bond bulls, while savoring a stellar rebound in returns fueled by growing recession fears, are braced for potential setbacks.

With most Treasury yields back below 3% and the Federal Reserve expected to raise rates to at least that level by the end of the year to throttle inflation, bond investors need ongoing confirmation that Fed rate hikes are biting the economy. A bigger-than-expected drop in a key manufacturing gauge on July 1 ignited this month’s rally. The next reading is on Monday.

July employment data at the end of the week, by contrast, could be more troublesome as still-strong labor market conditions are the main basis for the Fed’s conviction that a recession can be avoided. There are more than 50 days until the US central bank’s next policy decision on Sept. 21, leaving lots of room for pivoting. The timespan includes the Fed’s often groundbreaking annual symposium in Jackson Hole, Wyoming on Aug. 25-26.