Global bonds plunge into their first bear market in a generation

Global bonds plunged into their first bear market in a generation, under pressure from central bankers determined to quash inflation even at the expense of a recession.

he Bloomberg Global Aggregate Total Return Index of government and investment-grade corporate bonds has fallen more than 20 percent from its 2021 peak, the biggest decline since its inception in 1990.

US and European officials have in recent days stressed the importance of tighter monetary policy, building on Federal Reserve Chair Jerome Powell’s strong hawkish message at the recent Jackson Hole symposium.

Rising inflation and policymakers’ steep rate hikes in response have ended a four-decade bull market in bonds.

That creates a particularly difficult environment for investors this year as bonds and stocks decline together.

“I suspect the secular bond bull market that started in the mid-1980s is coming to an end,” said Stephen Miller, who has since covered fixed income and is now an investment advisor at GSFM, a unit of Canada’s CI Financial Corp. Yields will not return to pre-pandemic and post-pandemic historic lows.”

The very high inflation the world is now facing means central banks will not be ready to deploy the kind of extreme stimulus that has helped push government bond yields below 1 percent, he added.

The simultaneous impotence of fixed income and equity investing is undermining a mainstay of investment strategies over the past 40 years or more. Bloomberg’s bond gauge is down 16 percent in 2022, while the MSCI index of global equities has posted a larger decline.

That has pushed a U.S. measure of the classic 60/40 portfolio — in which investments are split between stocks and bonds according to those proportions — down 15 percent so far this year, on track for its worst annual performance since 2008.

“We’re in a new investing environment and this is a big deal for those who expect fixed income to offer diversification to take risk in equities,” said Kellie Wood, Fixed Income Asset Manager at Schroders in Sydney.

European bonds were hit the hardest this year as the Russian invasion of Ukraine sent natural gas prices soaring.

Asian markets have suffered less, helped by China’s bonds as they benefit from central bank easing there to try to turn around the world’s second largest economy.

The move across much of the world from unprecedented easing to the steepest rate hikes since the 1980s has dried up liquidity, according to JPMorgan Chase & Co.

“Bond and currency markets have seen a more severe and prolonged deterioration in liquidity conditions this year relative to other asset classes, with little sign of a reversal,” strategists including Nikolaos Panigirtzoglou wrote in a note. Bearish Bond momentum is nearing extreme levels, they said.

In many ways, the economic and political realities investors are now facing date back to the 1960s bond bear market that began in the second half of that decade, when a period of low inflation and unemployment came to an abrupt end.

As inflation accelerated in the 1970s, benchmark Treasury yields skyrocketed. They reached nearly 16 percent later in 1981 after then-Fed Chairman Paul Volcker raised interest rates to 20 percent to tame price pressures.

Powell cited the 1980s to support his hawkish stance at Jackson Hole, saying “the historical record strongly cautions against relaxing policy prematurely”. Swap traders now see a nearly 70 percent chance that the Fed will deliver a third straight 75 basis point rate hike when it meets just over three weeks from now.

Other central bankers in Jackson Hole, from Europe to South Korea and New Zealand, have also indicated rates will continue to rise at a rapid pace.

Still, fixed income investors are showing strong demand for government bonds as yields rise, helped by ongoing expectations that policymakers will have to change course should the economic slowdown help ease inflation.

In the US, options markets are still pricing in at least a 25 basis point rate cut next year.

“I wouldn’t characterize the current trend as a new secular bond bear market, but rather as a needed correction from a period of unsustainably ultra-low yields,” said Steven Oh, global head of credit and fixed income at PineBridge Investments LP.

“Our expectations are that yields will remain low by long-term historical standards and 2022 will likely mark the peak of 10-year bond yields in the current cycle.”

Schroders is also beginning to see some value in government bonds as yields rise, and is positioning portfolios for the real risk of severe economic slowdowns, according to Wood.

“There will be an excellent opportunity to buy bonds in the not too distant future as central banks guarantee us a global recession,” she said. Global bonds plunge into their first bear market in a generation

Fry Electronics Team

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