Bond Investors Bet the Recession Trade Is Just Getting Started

For all the volatility whipsawing the US bond market, traders are showing increasing confidence that the alarm bells warning of a recession will only get louder.

The jump in consumer prices in June by another four-decade high reinforced the near-certainty that the Federal Reserve will keep tightening monetary policy aggressively, with markets placing mounting odds on a full-percentage-point hike this month. That would be the biggest increase since the Fed started directly using the overnight rate to conduct monetary policy in 1990s, raising the risk that growth will stall as higher interest rates hit the economy.

The lengths the central bank is likely to go to tame inflation has left investors pouring into wagers on longer-term bonds, anticipating the securities will outperform if the nation lapses into a recession.