Global bond markets have suffered the deepest fall since at least the 1990s as investors brace themselves for rapid hikes in interest rates from central banks that have been battling the worst inflation in decades.
The Bloomberg Global Aggregate Index, a broad gauge of government and corporate debt, has fallen more than 11 percent since its peak in January 2021, marking a 10.8 percent drop during the 2008 financial crisis and the steepest drop in history. . of the index running until 1990.
Sales have picked up since the start of the year as central bankers signal their determination to rein in inflation, which has risen to the highest level in decades – even as they try to call off the economic recovery in the process. take the risk. Federal Reserve Chairman Jay Powell indicated on Monday that the US central bank is ready to take more aggressive action if necessary to curb price hikes after raising interest rates last week for the first time since 2018.
Markets are now expecting at least seven more rate hikes in US rates this year. The Bank of England raised interest rates for a third consecutive meeting this month and expects to raise short-term borrowing costs above 2 percent by the end of 2022.
Even the European Central Bank at its most recent meeting outlined a faster-than-expected closure of its bond-buying program. Its alarming sign comes as policy makers focus on record inflation despite the eurozone facing a greater hit than many other global economies from the war in Ukraine.
“It’s a very different world for bond investors,” said Mike Riedel, a senior portfolio manager at Allianz Global Investors. “For the past 20 years we have lived in a world where, as growth begins to weaken, central banks tend to ease policy. Now they are determined to tighten, even if it threatens a recession. “
The US Treasury market – which is in for its worst month since November 2016 – has suffered the brunt of recent sales. US 2-year note yields, which are highly sensitive to expectations of the path of short-term interest rates, climbed to a three-year high of 2.2 per cent this week, up from just 0.73 per cent at the start of the year. , The two-year Treasury is on track to record its biggest quarterly increase in yield since 1984.
Long-term yields have also bounced, albeit at a slower pace, largely as a result of rising inflationary expectations, which take away the attractiveness of holding securities that provide a fixed stream of income over a long period of time. Huh. The US 10-year yield rose to the highest level since May 2019 at 2.42 per cent on Wednesday.
Bonds in Europe have followed suit, while government bonds in Japan – where inflation is low and the central bank is expected to buck a global bullish trend – have posted losses this year.
Corporate debt has suffered even more, with the additional yield widening, or spread, providing relative to government bonds, adding to the pain for investors.
“The worst-case scenario for credit investors is when both interest rates and credit spreads go against you,” said Tatjana Greil Castro, co-head of public markets at Muzinich & Co. “That’s exactly what we’re experiencing right now.”
The spread on the Ice Data Index measure of high-grade European corporate debt has increased from 0.98 percentage points at the end of last year to 1.45 percentage points. The equivalent US spread has risen from 0.98 percentage points to 1.31 percentage points.
“Interest rates have gone up in all jurisdictions. You can’t just say ‘we will focus on Europe or we will focus on the UK’. Geographically there’s nowhere to hide,” said Gril Castro
Equity markets also tumbled along with the loss of the best-secured government debt. Although stocks have recovered most of the losses they have incurred since Russia’s invasion of Ukraine, major indices including the S&P 500 are lower so far this year.
For some investors, the move renews doubts about bonds’ traditional role within a portfolio as a counterweight when riskier assets suffer, such as 60 percent equities and 40 percent bonds. Classic “balanced” portfolio.
“It’s a big challenge for the 60-40 model,” said Eric Fine, Van Eck’s portfolio manager. “All bond funds are seeing outflows including Treasury funds. Investors haven’t experienced it, analysts haven’t experienced it, it’s a new paradigm.