LONDON (BLOOMBERG) - Losses in global bond markets have marked a milestone as central banks including the United States Federal Reserve look to tighten policy to combat surging inflation.
The Bloomberg Global Aggregate Index, a benchmark for government and corporate debt, has fallen 11 per cent from a high early last year. That is the biggest decline from a peak in data stretching back to 1990, surpassing a 10.8 per cent drawdown during the global financial crisis in 2008.
Most bonds pay a fixed interest rate that becomes more attractive if interest rates fall, driving up demand and the price of the bond. Conversely, if interest rates rise, investors will no longer prefer the lower fixed interest rate paid by a bond, resulting in a decline in its price.
The Fed raised interest rates by 25 basis points last week, and its chair Jerome Powell said this week it is prepared to increase them by a half percentage-point at its next meeting if needed. Higher borrowing costs risk further dampening the return on debt, eroded by the fastest pace of consumer-price increases in decades.
"A high volatility regime should remain in place in the months ahead as the situation remains fluid on the geopolitical and economic front," said Mr Norman Villamin, chief investment officer wealth management at Union Bancaire Privee, adding that investors should focus on credit quality and stay short duration.
It is a blow to money managers accustomed to years of consistent gains, backstopped by loose monetary policy. Stocks are staring down a bear market, upending the dynamics of a classic 60/40 portfolio that is meant to balance out any losses from riskier equities with the more stable cash flow of bonds.
Data on the Bloomberg Global Aggregate Index before 1999 is monthly rather than daily and the constituents and duration of aggregate indexes fluctuate. Fixed income investors can still make money by betting against bonds.