Global bonds tumble into their first bear market in a generation
Under pressure from central bankers determined to cancel inflation even at the cost of a recession, the world obligations collapsed in their prime bear market in one generation.
The Bloomberg Global Aggregate Total Return Index of investment-grade government and corporate bonds fell more than 20% below its 2021 peak, the biggest drop since its inception in 1990. State officials States in Europe have been stressing the importance of tighter monetary policy in recent days, building on the strong hawkish message from Federal Reserve Chairman Jerome Powell at the recent Jackson Hole symposium.
Soaring inflation and steep interest rate hikes deployed by policymakers ended a four-decade bond bull market. This has created a particularly difficult environment for investors this year, with bonds and stocks crashing in tandem.
“I suspect the secular bond bull market that started in the mid-1980s is coming to an end,” said Stephen Miller, who has covered fixed income since then and now works as an investment consultant at GSFM, a unit of CI Financial Corp. from Canada. “Yields will not return to historic lows seen before and during the pandemic.
The very high inflation the world is currently facing means that central banks will not be ready to deploy the kind of extreme stimulus that has helped drive Treasury yields below 1%, he added. .
The simultaneous slumps in fixed income and equities are undermining a mainstay of investment strategies for the past 40 years or more. Bloomberg’s bond gauge fell 16% in 2022, while MSCI Inc.’s global equity index saw a bigger decline.
That pushed a US measure of the classic 60/40 portfolio – where investments are split in those proportions between stocks and bonds – down 15% so far this year, on track for its worst annual loss since 2008.
Back to the 60s
In many ways, the economic and political realities facing investors today date back to the bond market of the 1960s, which began in the second half of that decade when a period of low inflation and unemployment suddenly came to an end.
As inflation accelerated during the 1970s, yields on benchmark Treasuries soared. They would later reach nearly 16% in 1981 after Fed Chairman Paul Volcker raised rates to 20% to rein in price pressures.
Powell cited the 1980s to support his hawkish stance in Jackson Hole, saying “the historical record strongly cautions against premature policy easing.” Swap traders now see a nearly 70% chance that the Fed will make a third straight 75 basis point hike when it meets in just over three weeks.
Other central bankers in Jackson Hole, from Europe to South Korea and New Zealand, have also signaled that rates will continue to rise at pace.
Still, fixed-income investors are showing strong demand for government bonds as yields rise, helped by lingering expectations that policymakers will need to reverse course if economic downturns help calm inflation. In the United States, options markets are pricing in even more of a 25 basis point rate cut next year.
“I wouldn’t characterize the current trend as another secular bond bear market, but rather as a necessary correction after a period of unsustainably low yields,” said Steven Oh, global head of credit and fixed income at PineBridge. Investments LP. “Our expectation is that yields will remain low by long-term historical standards and 2022 will likely represent the peak for 10-year bond yields in the current cycle.”
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