Bond traders are betting that the US economy is on the verge of deterioration and that the Federal Reserve will need to start loosening monetary policy aggressively to stave off a recession. Previous fears of high inflation have largely disappeared, quickly giving way to new fears that the economy will stall unless the central bank starts cutting interest rates from more than 20-year highs. That is driving bond markets to one of the best rallies since fears of a banking crisis erupted in March 2023. The rally was so strong that the yield on the policy-sensitive two-year Treasury fell 50 basis points last week to less than 3.9 per cent. Not since the global financial crisis and the dotcom bust has the yield been so much lower than the Fed's base rate, which is now around 5.3 per cent.