NR-Analysis: Inflation bites and one asset is in trouble. Bear market for bonds?


“Worst year in history” as the decline in bond markets brings turmoil and pain for fixed income investors. Global bonds have so far this year already lost a fifth of the value. Since Jerome Powell sent the hawkish message to the markets during the August Jackson Hole symposium. This at a time when the ICE BoFA U.S Treasury Index is on the worst yearly performance ever.

Europe was hit hard as well with the worst monthly performance in decades in August. Many European countries bonds sent the Bloomberg Global Aggregate Bond Index down a staggering 20% from its peak, for the first time ever.

“This is the worst year in history by far for fixed income,” said Lawrence Gillum, fixed income strategist for LPL Financial. “If that’s not a bear market in bonds I don’t know what is.”

Sell-off in bonds saw yields on 10-year Treasury hit an 11-year high in June and rallied along with stocks over the summer. Only to sell off again which sparked fears that new lows might be coming.

As usual with declines of more than 20% they are referred as a bear market when they hit the stocks, though somewhat unknown in bonds, the asset class that marks reliable returns and stability. From the year 1990 to its peak in January 2021 the global index had delivered an aggregate total return of nearly 470%. This in a period spanning much of a generation-long bull market in bonds.

Investors are betting on the weakness in bonds and that it will continue as central banks tighten their monetary policy to bring down inflation in much of the world.

In the US investors broadly believe the Fed will raise rates by 75 basis points later this month. Across the pond, it is believed the European Central Bank could hike as well next week. US jobs report is closely watched by investors making this Friday an important one.

According to Commodity Futures Trading Commission data hedge funds and other investors are net bearishing up 30% since the end of July.

Gregory Whiteley, a portfolio manager at DoubleLine, believes U.S. inflation, which showed signs of ebbing in the latest consumer prices report, will likely persist, taking two-year yields to 4%. Longer-dated Treasuries, however, may be nearing a bottom, he said.

The Bloomberg U.S. Aggregate Bond Index (.BCUSA) is down 12.5% from its highs, more than double any previous peak-to-trough decline going back to the 1970s.