Global bond market’s worst year since 1999

The global bond market is on track for its worst year since 1999 after soaring inflation across the globe destroyed an asset class often allergic to rising prices.

The Barclays Global Composite Bond Index — a broad benchmark of $68 billion for government and corporate debt — has delivered a negative 4.8% return so far in 2021.

The decline was largely driven by two periods of heavy selling of government debt. At the start of the year, investors sold longer-term government bonds in so-called “recycle trades” as they bet that the recovery from the pandemic would usher in a period of sustained growth and inflation. steady. Then, in the fall, shorter-term loans surged as central banks signaled they were bracing for high inflation accompanied by rate hikes.

In the US, which accounts for more than a third of the index and saw inflation rise to a four-decade high of 6.8% in November, the yield on 10-year US Treasuries rose to 1. .49% from 0.93% at first. during the year, reflecting falling bond prices. The two-year yield rose to 0.65% from 0.12%.

“We shouldn’t be too surprised that bonds are a bad investment when inflation is at 6%,” said James Athey, a portfolio manager at Aberdeen Standard Investments. “The bad news for bond investors is that next year also looks tough. We have the potential for another shock if central banks move faster than expected and I don’t think [riskier bonds] has a particularly attractive price. ”

Barclays Global Aggregate Bond Index Annual Yield column chart (%) shows a bad year for bonds

During the four decades of the bond market boom, years of negative returns were relatively few and far between. The global composite index last posted weaker returns in 1999, when it lost 5.2% as investors fled the bond market because of the dotcom-era stock market boom.

Despite the losses for 2021 and the prospect of monetary tightening next year from the Federal Reserve and other central banks, some fund managers think it’s too early to put a date on the market. 40-year appreciation market equals fixed income.

Long-term yields peaked in March and have fallen back down even as markets turn to prices in three rate hikes from the Fed and four from the Bank of England next year, along with reduced asset purchases. of the European Central Bank.

According to Nick Hayes, a portfolio manager at Axa Investment Managers.

“The more you raise rates today, the more they have to come down in a few years,” says Hayes. “And if the stock market pulls back a bit, people will suddenly like bonds again. I’m not saying we’ll get double-digit returns next year, but the simple fact is that if you look back decades, a negative year tends to be followed by a positive year.”

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