European bonds have been hit particularly hard.
Kai Pfaffenbach/Reuters
Global bonds have tumbled into their first bear market in more than 30 years.
Soaring inflation has forced central banks to hike interest rates aggressively, causing carnage.
The Fed has hiked interest rates 2.25 percentage points since March and isn’t done yet.
Global bonds have tumbled into their first bear market in more than 30 years, as soaring inflation forces central banks to rapidly raise interest rates.
The Bloomberg Global Aggregate Total Return Index has now dropped just over 20% since hitting a peak at the start of January — the common definition of a bear market. That’s the biggest drop since the index began in 1990.
The index, which tracks the returns to global government and corporate bonds, has fallen back to levels last seen in 2015.
It’s a remarkable turnaround for the assets that underpin much of the global financial system. In recent years, investors have often hailed a multi-decade bear market in bonds, driven by years of falling inflation and interest rates.
Yet that run has come to an abrupt end in 2022 as inflation has soared to multi-decade highs around the world, which has forced central banks to embark on the most aggressive interest-rate hikes since the 1980s.
When central banks hike interest rates, new bonds which come on the market offer a higher yield. That causes investors to dump currently existing bonds, which offer lower returns.
European bonds have been particularly hard hit in 2022 as Russia’s invasion of Ukraine has rocked the region. Soaring energy prices and political instability in Italy have put investors off the debt of the region’s governments and companies.
Bloomberg
Analysts have said the massive selloff has been worsened by the fact that many investors failed to appreciate the extent of the surge in inflation and therefore the scale of central banks’ responses.
“The recent bond selloff was painful not only because of how quickly rates have risen but also because they have been rising more than markets expected,” said Jim Solloway, chief market strategist at SEI.
Yet he added: “While rising rates can be painful for bond holders in the short term as current prices are driven lower, the higher yields that result will eventually mean higher nominal income streams and returns, all else equal.”
The Federal Reserve, the most important central bank in the world, has hiked interest rates 2.25 percentage points since March. Investors expect them to peak at close to 4% in March 2023, according to Bloomberg data based on futures markets.
Fed hikes drive the yield on the 10-year US Treasury note, which sets the tone for borrowing rates and moves inversely to the price, to an 11-year high of 3.5% in June. It last traded at around 3.26%, up from 1.514% at the start of the year.
Investors are cautious about the outlook for bonds. An economic slowdown could push up prices of government bonds as investors seek safe assets, while higher yields are also likely to attract some buyers. However, bond markets could be set for more pain, if inflation does not come down as expected.