Global bonds tumble into their first bear market in a generation

Soaring inflation and the steep interest-rate hikes have brought to an end a four-decade bull market in bonds. PHOTO: REUTERS

SYDNEY - Under pressure from central bankers determined to quash inflation even at the cost of a recession, global bonds have slumped into their first bear market in a generation.

The Bloomberg Global Aggregate Total Return Index of government and investment-grade corporate bonds has fallen more than 20 per cent below its 2021 peak, the biggest drawdown since its 1990 inception. 

Officials from the United States to Europe have hammered home the importance of tighter monetary policy in recent days, building on the strong hawkish message from Federal Reserve chair Jerome Powell at the recent Jackson Hole symposium.

Soaring inflation and the steep interest rate hikes deployed by policymakers in response have brought to an end a four-decade bull market in bonds. This has created a particularly difficult environment for investors this year, with bonds and stocks sinking in tandem.

"I suspect that the secular bull market in bonds that started in the mid-1980s is ending," said Mr Stephen Miller, an investment consultant at GSFM, a unit of Canada's CI Financial. "Yields are not going to return to the historic lows seen both before and during the pandemic."

The very high inflation that the world now faces means central banks will not be prepared to deploy the sort of extreme stimulus that helped send Treasury yields below 1 per cent, he added.

The simultaneous swoons for fixed income and equity assets are undermining a mainstay of investing strategies over the past 40 years or more. Bloomberg's bond gauge is down 16 per cent in 2022, while MSCI's index of global stocks has seen a larger decline.

This has pushed a measure of the classic 60/40 portfolio - where investments are split by those proportions between stocks and bonds - down 15 per cent so far this year, on track for its worst annual loss since 2008.

Back to the '60s

"We are in a new investment environment, and this is a huge deal for those expecting fixed income to be a diversifier to risk off in equities,” said Ms Kellie Wood, a fixed-income money manager at Schroders in Sydney. 

Swaps traders now see almost 70 per cent odds that the Fed will deliver a third-straight hike of 75 basis points when it meets in just over three weeks.

Other central bankers at Jackson Hole, from Europe to South Korea and New Zealand, also indicated that rates would continue to rise at pace.

Still, fixed-income investors are showing plenty of demand for government bonds as yields rise, aided by lingering expectations that policymakers will need to reverse course should economic slowdowns help cool inflation. In the US, options markets are still pricing in more than one 25-basis point rate cut next year.

"I would not characterise the current trend as a new secular bond bear market but more of a necessary correction from a period of unsustainably ultra-low yields," said Mr Steven Oh, global head of credit and fixed income at PineBridge Investments.

"Our expectations are that yields will remain low by long-term historical standards and 2022 is likely to represent the peak in 10-year bond yields in the current cycle." 

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

"In the not-so-distant future, there is going to be a cracking opportunity to be buying bonds as central banks guarantee us a global recession," she said. BLOOMBERG

Join ST's Telegram channel and get the latest breaking news delivered to you.