Bonds outperform stocks globally as recovery hopes fades

Bond returns are exceeding stock gains by the widest margin in nine years as optimism that greeted the year evaporates and investors around the world question the strength of the economic recovery.

While the MSCI World Index of stock prices in 24 developed countries fell 9.5 per cent in the first half of 2010, bonds gained 4.2 per cent, reversing the 5.1 percentage point lead stocks had over debt during the same period in 2009, the Bank of America Merrill Lynch Global Broad Market Index showed.

Growing budget gaps in Greece, Spain and Portugal sent the euro down 15 per cent and commodities posted the biggest loss in almost a decade as oil dropped 4.7 per cent.

Concerns that Europe would lead the world into the second global recession in three years spurred losses in all 10 Standard & Poor's 500 Index industries and dragged the Shanghai Composite Index down 26 per cent with dividends, data compiled by Bloomberg show.

A labour department report tomorrow may show the US lost jobs for the first time this year even as President Barack Obama said the nation faces "headwinds" from Europe.

Federal Reserve Bank of Atlanta president Dennis Lockhart said on Wednesday that the US economic rebound isn't strong enough to warrant raising interest rates or shrinking the central bank's near-record balance sheet. Instability in financial markets poses a "major downside risk" to global growth and "urgent action" is needed to rein in budget deficits, the International Monetary Fund said in a report last month to the Group of 20 finance ministers.