(Bloomberg) -- Treasuries began the second half of the year on the front foot Friday as concerns continued to mount that Federal Reserve rate hikes will lead to a recession. 

Benchmark 10-year yields fell six basis points to 2.95% in a fourth day of declines and looked set for their biggest weekly drop in seven weeks. The move spread to other markets with Australia’s three-year bond yields tumbling 21 basis points, just days before its central bank is expected to announce a half-point rate increase. 

“The market is digesting increasing odds of recession,” said Janet Rilling, senior portfolio manager at Allspring Global Investments. And it’s likely that “inflation will stay pretty elevated. So the Fed will continue to be aggressive.”

The latest leg of the global bond-market rally came after Fed Chair Jerome Powell said Wednesday that the risk of harm to the economy from higher rates was less important than restoring price stability. Traders continue to expect another 75-basis-point rate increase in July but bets on a peak have been pulled back to March 2023.

The prospects for a recession were enhanced overnight after data showed personal spending for May rose 0.2%, half the expected increase. The price index for purchases rose 0.6% versus an expected 0.7%, supporting the view that an inflation peak is being established. 

Market-implied inflation expectations have been falling steadily along with nominal yields over the past three weeks. Among them, the five-year forward estimate of the five-year expected inflation rate is back around 2.1%, where it stood in February before spiking to 2.6% in April. The Fed targets a 2% average inflation rate over time.

The late-June rally in Treasuries trimmed a year-to-date loss that eclipses even the biggest annual losses since the early 1970s.

A broad index measuring the performance of Treasuries has fallen over 9% in 2022. Since 1973, the bond market has only posted five annual declines, with the most recent being a drop of 2.3% last year.

“Flows associated with quarter-end surely deserve some of the credit for the move, but the scale of the repricing also suggests the peak-inflation and recession narrative is gaining momentum,” said BMO Capital Markets strategist Ian Lyngen of the decline in yields. 

(Updates with Australia bond yields in second paragraph)

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