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Friday, May 20, 2022

Bond market in historic recession in the face of inflation

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Although the measures of the central banks seek to fight against inflationinvestors fear this will lead to a historical recession. while the bond market is under pressure, according to Tommy Stubbington and George Steer in the Financial Times.

The Bloomberg Global Aggregate Indexa broad gauge of government and corporate debt, has fallen by more than eleven% from its peak in January 2021eclipsing a fall 10.8% during the 2008 financial crisis and mark the strongest pullback in the index’s history dating back to 1990.

The selling has accelerated since the beginning of the year as central bankers signal their determination to rein in inflation that has soared to the highest levels in decades. Even if they risk stifling economic recovery in the process. The Federal Reserve Chairman Jay Powell on Monday hinted that the US central bank is prepared to act more aggressively if needed to rein in price increases after raising interest rates last week for the first time since 2018.

Markets now expect at least there are additional additional items in the US this year. The Bank of England raised interest rates for third time in a row this month and is expected to raise short-term loan costs above the two% for 2022 fine.

including the European Central Bank describe below settlement more quickly than expected of your bond purchase program at their most recent meeting. His hardline signal comes as policymakers focus on one inflation record despite the eurozone facing a bigger hit than many other global economies from the conflict in Ukraine.

“This is a very different world for bond investors,” he said. Mike Riddell, retired senior Carter at Allianz Global Investors. “For the last 20 years we have lived in a world where as soon as growth starts to weaken, central banks look to ease policy. They are now determined to hang on even if that risks a recession.”

The US Treasury market, on track for its worst month since November 2016, has borne the brunt of recent selling. The US 2-Year Note Yield, which is highly sensitive to expectations of the path of short-term interest rates, rose to a three-year maximum of 2.2% This week, from just 0.73% at the beginning of the year. The two-year Treasury is on track to post its biggest quarterly rise in yield since 1984.

Go longer-term performances have also warned, albeit more slowly, largely as a result of rising inflation expectations, which reduce the attractiveness of holding securities that guarantee a steady stream of long-term income. The 10 year US bond yield reached its highest level since May 2019 with a 2.42% on Wednesday.

Go bonds in europe have followed suit, while even government bonds in Japan, where inflation is lower and the central bank is expected to buck the global trend of aggression, have posted losses this year.

In addition to the pain for investors, the corporate debt it has suffered even steeper losses, widening the additional yield, or spread, it offers relative to government bonds.

“For credit investors, the bleakest scenario is when both interest rates and credit spreads move against them,” he said. Tatjana Greil Castro, co-head of public markets at Muzinich & Co. “That is exactly what we are experiencing right now.”

The differential in a measure of Ice data indices of the European high grade corporate debt has grown a 1.45 percentage points from 0.98 percentage points last year’s fine. The US differential equivalents. has been expanded 1.31 percentage points from 0.98 percentage points.

“Interest rates have risen in all jurisdictions. You can’t just say we will focus on Europe or we will focus on the UK. “Geographically there is nowhere to hide,” he said. Greil Castro

read losses of the safest public debt they have also accompanied a retreat in the equity markets. Although stocks have recovered most of the losses they suffered since the crisis in Ukraine, major indices, including the S&P 500, remain lower year-to-date.

For some investors, the moves renew doubts about the traditional role of bonds within a portfolio as a counterweight that tends to recover when riskier assets are changing, such as the classic “balanced” wallet 60% shares and 40% bonds.

“It’s a big challenge for the 60-40 model,” he said. Eric Fine, Van Eck Portfolio Pensioner. “All bond funds are experiencing outflows, including Treasury funds. Investors haven’t experienced this, analysts haven’t experienced this, it’s a new paradigm.”

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