(Bloomberg) — Global fixed-income markets have suffered unprecedented losses since peaking last year as central banks, including the Federal Reserve, seek to support their policy to combat rising inflation.
The Bloomberg Global Aggregate Index, a benchmark of total returns on government and corporate debt, has fallen 11% from its peak on record in January 2021. This is the biggest decline since a peak in data dating back to 1990, surpassing the 10.8% drop during the 2008 financial crisis. It equates to a decline in the index’s market value of about $2.6 trillion, higher than about $2 trillion in 2008.
It’s a golf course for fund managers accustomed to years of steady earnings, backed by easy monetary policy. The crash also poses a particular threat to the growing elderly population in many major economies, so retirees often rely heavily on fixed-income investments.
Rising inflationary pressure around the world is also raising concerns about the ability of the global economy to weather any sustained period of higher financing costs as the pandemic drags on in many places. For investors, this means the appeal of holding debt, even insurance on government bonds, is diminishing, given how sensitive valuations are to interest rates, a measure known as duration.
“The safe-haven attributes of Treasuries have been undermined when duration risk is added to the equation,” said Winson Phoon, director of fixed income research at Maybank Securites Pte. Limited.
The Fed raised interest rates by 25 basis points last week, and its chairman, Jerome Powell, said this week that he is prepared to raise them by half a percentage point at the next meeting if necessary. His tough tone prompted traders to quickly raise estimates of how aggressively the Fed has endured monetary policy this year, with money markets pricing in the equivalent of seven additional quarter-point hikes for 2022 penalties.
“Fixed income headwinds remain strong,” from Todd Schubert, director of fixed income research at Bank of Singapore. “Investors need to recalibrate return expectations and be agile to exploit market dislocations.”
Higher borrowing costs risk further dampening yields on debt, eroded by the fastest pace of consumer price rises in decades. The sharp rebound in commodity prices after the Russian invasion of Ukraine could worsen the outlook. Corporate bonds are particularly vulnerable to growing stagflation threats, as slowing economic growth also increases credit risks.
Stocks have rallied in recent days as more investors bet they helped hedge against inflation, but then global stocks are still down about 6% this year.
The decline in fixed income and equity markets in 2022 is altering the dynamics of a classic 60/40 portfolio that seeks to balance losses from riskier equity markets with more stable cash flow from bonds.
The collapse of global debt markets is a reminder of the Fed’s tightening cycle during 2018, although the broad global bond index ended up losing just 1.2% that year. But unlike four years ago, price pressures are now much higher and the global supply chain is under threat.
For emerging Asia, the threat of stagnant growth and accelerating inflation adds to the upside risk to yields, according to Australia & New Zealand Banking Group Ltd.
“It is likely that we will continue to see upward pressure on yields as we expect monetary tightening in several Asian economies to kick in” in the second half of the year, said Jennifer Kusuma, senior Asia rates strategist at the bank.
The dates of the Bloomberg Global Aggregate Index prior to 1999 are monthly and not daily, and the components and duration of the aggregate indices fluctuate. Fixed income investors can still make money betting against bonds.
Global bond index sheds $2.6 trillion in record drop from peak
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