(Bloomberg) -- Three years after a surge in inflation pummeled fixed-income markets all around the world, global bonds have finally re-entered bull market territory.

Bloomberg’s GlobalAgg Index, which tracks returns on sovereign and corporate debt across developed and emerging markets, has surged more than 20% from its 2022 trough to its highest level since March 2022 amid a broad fixed-income rally. The latest leg higher came as cooling US labor data fueled bets the Federal Reserve would step up policy easing.

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Traders now expect the Fed to reduce interest rates by 25 basis points next week, with some wagers pointing to a half-point move. Bonds have been gaining ground as major central banks slash borrowing costs in response to ebbing inflation and mounting signs of labor market strain.

“The dominant theme in the markets over the past 24 hours has been the continued global bond rally,” Deutsche Bank AG strategists including Jim Reid, wrote in client note. “This has helped ease pressure on the latest French political crisis.”

Strong appetite has also been evident in primary markets, where issuers including the UK have drawn bumper books in recent weeks. On Tuesday, the European Union pulled in orders of more than €98 billion ($115 billion) for a 30-year bond, while a five-year tranche amassed demand of more than €70 billion.

In corporate bonds, the yield on global investment-grade debt fell four straight days to 4.26% on Monday, the lowest level since August 2022, according to a Bloomberg index.

What Bloomberg Strategists Say...

“Bloomberg’s Global Aggregate Bond Index has rebounded more than 20% from its 2022 low, establishing a new bull market by the standard definition. But this is not a vote of confidence in sovereign debt – if anything, it’s perhaps the opposite. Aggregate indexes are made up principally of sovereign, corporate and securitized debt. It is global corporate bonds that have been the clear outperformer.”

— Simon White, Macro Strategist. For the full analysis, click here.

Still, longer-dated bonds in some regions remain under pressure amid mounting fiscal risks. That angst is particularly concentrated in markets like France, where the prime minister just lost a confidence vote over proposed budget cuts and is set to resign later today.

In the UK, investors await Chancellor Rachel Reeves’s November plan to balance growth initiatives with spending restraint. The 30-year gilt yield reached a 1998-high of 5.75% last week, before recovering to trade around 5.47%.

In Japan, Prime Minister Shigeru Ishiba’s decision to step down has fueled uncertainty, raising the prospect of a successor viewed as less committed to fiscal discipline. Japan’s 30-year yield is around an all-time high.

But while government debt levels are creating some tension, there is a sense of optimism among investors over attractive buying opportunities, according to Ben Hayward, chief executive at TwentyFour Asset Management. A recent survey undertaken by the firm showed that 80% of institutional investors agree that, at current yields, bonds are attractive on a cross-asset basis.

“Higher yields improve potential returns, but they can also give portfolios some protection against volatility, so it is no surprise to see investors increasing allocations to fixed income across sectors,” Hayward said.

--With assistance from Helene Durand.

(Updates with additional context, comment from fifth paragraph.)

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