Bonds Tumble Into Their First Bear Market in a Generation

Under pressure from central bankers determined to quash inflation even at the cost of a recession, global bonds 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% from its 2021 peak on an unhedged basis, the biggest drawdown since its inception in 1990.

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

Rapid interest-rate hikes deployed by policy makers in response to soaring inflation have brought to an end a four-decade bull market in bonds. That’s creating a difficult environment for investors, 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 Stephen Miller, who’s covered fixed income since then and now works as an investment consultant at GSFM, a unit of Canada’s CI Financial Corp. “Yields aren’t going to return to the historic lows seen both before and during the pandemic.”

The elevated inflation the world now faces means central banks won’t be prepared to re-introduce the sort of extreme stimulus that helped send Treasury yields below 1%, he said.

On a hedged basis, the bond index fell as much as 12% from its peak. The simultaneous swoons for fixed-income and equity assets are undermining a mainstay of investing strategies over the past 40 years or more. MSCI Inc.’s index of global stocks has slumped 19% this year.

That has pushed a U.S. measure of the classic 60/40 portfolio – where investments are split by those proportions between stocks and bonds — down 15% this year, on track for the worst annual performance since 2008.

‘Huge Deal’

“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 Kellie Wood, a fixed-income money manager at Schroders Plc in Sydney.

European bonds have been hit hardest this year as Russia’s invasion of Ukraine sends natural gas prices soaring. That includes the UK: a Bloomberg index tracking investment grade sterling bonds also fell into a bear market this week.

The yield spread between sterling and dollar-denominated corporate bonds is the widest since 2014, reflecting the particularly acute pressures in the UK where the highest inflation for 40 years is fueling a cost-of-living crisis. The Bank of England has warned the country will enter five consecutive quarters of recession later this year.

Asian markets have suffered less, aided by China’s debt, as the central bank there eases policy to try and turn around the world’s second-largest economy. Investment-grade dollar bond spreads narrowed last month by the most since 2020, driving them tighter than those of US peers, something that’s happened only a few times in the last decade.

The switch in much of the world from unprecedented easing to the steepest rate hikes since the 1980s has dried up liquidity, according to JPMorgan Chase & Co.

“Bond and currency markets have seen more severe and more persistent deterioration in liquidity conditions this year relative to other asset classes with little signs of reversal,” strategists including Nikolaos Panigirtzoglou in London wrote in a research note. Bearish bond momentum is approaching extreme levels, they said.