US government bonds rallied and global stock markets dropped sharply, as worries about inflation were replaced by concerns that the global economic recovery from coronavirus has peaked.

The yield on the 10-year Treasury bond, which moves inversely to its price, fell 0.04 percentage points to 1.276 per cent. The move put the world’s benchmark bond yield, which influences borrowing costs for companies and households worldwide, at its lowest level since early February and on track for its biggest weekly drop since June 2020.

Stock markets fell first in Asia before the negative mood rippled into Europe then on to Wall Street, in a move analysts blamed on a sudden realisation that high rates of US economic growth were about to peak at the same time as signs of a slowdown in China.

Wall Street’s S&P 500 index fell 1.5 per cent in early trades, while the technology-focused Nasdaq Composite also dropped 1.5 per cent. The Stoxx Europe 600 lost 2.3 per cent after Hong Kong’s Hang Seng index ended the session 2.9 per cent lower.

“We are seeing an asset allocation change with people selling risky assets across the board and buying into the safer returns of government bonds,” said Shaniel Ramjee, senior investment manager at Pictet Asset Management.

This marked a contrast from the first half of the year when investors worried about the US economy overheating. They sold off Treasuries whose fixed interest payments are eroded by inflation and bought shares in businesses in economically sensitive industries, such as banks and energy producers.

“Markets tend to focus on only a few things at once,” Ramjee said. “The focus has switched to US growth accelerating less than it has been . . . and there is now more attention on China.”

On Wednesday, China’s government said it would use “timely” cuts in banks’ reserve ratio requirements to keep money flowing around the economy. The move sent a signal that Chinese second-quarter gross domestic product data due next week “might fall short of market expectations” of 8 per cent expansion over the same time last year, according to Daiwa economist Chris Scicluna.

Chinese ports and factory districts have been grappling with outbreaks of the Delta variant of coronavirus, while Japan has declared that Tokyo will be under a state of emergency throughout the Olympic Games to contain infections.

In minutes of its latest meeting released on Wednesday, Federal Reserve officials said that “uncertainty around the economic outlook was elevated”. Economists expect US GDP to have expanded at an annualised rate of more than 9 per cent in the second quarter of this year, and to moderate thereafter.

The dollar index, which measures the greenback against major currencies, fell 0.4 per cent on Thursday. Brent crude, the oil benchmark, dropped 0.3 per cent to $73.20 a barrel.

Bonds also rallied in Europe. Germany’s 10-year Bund yield dropped 0.03 percentage points to minus 0.323 per cent, its lowest since March. Spain’s Ibex share index fell 2.6 per cent and Italy’s FTSE MIB lost 2.9 per cent.

Markets were trading “on expectations we’ve seen the highest growth numbers being printed” after last year’s coronavirus shutdowns, said Maarten Geerdink, head of European equities at NN Investment Partners. He added that “price action” was “now self-feeding”, as traders sold stocks in case they were hit harder.