Debt hangover will cause tentative recovery to falter

U.S.

In the second quarter, the tone of the economic backdrop to the markets shifted from cautious optimism to doubt about the sustainability of the global recovery.

In turn, this change infected the pricing of risk assets of all types and drove investors to park funds, at least temporarily, in safe havens such as US Treasuries and money market funds. Two clear indicators of this sea change are the S&P 500, which declined -11.43% in the quarter, and the 10-year Treasury bond, whose yield dropped from 4.1% in early April to below 3% by the end of June. The already tentative recovery in developed markets, including most importantly the US, appears, if anything, even more fragile for several reasons. The early effect of government stimulus programmes...