Worst Bond Losses in Decades Show Volatility Starts to Sting
(Bloomberg) -- Government and corporate bonds around the world have tumbled in their worst start to a year this century, as markets spooked by the prospect of resurgent inflation turn increasingly volatile.
The notes have lost about 3.7% so far in 2021, even after dip-buying in recent days, according a Bloomberg Barclays index of investment-grade securities across currencies going back to 1999. That’s worse than for similar periods in previous years.
An unprecedented confluence of events has triggered concerns that faster inflation will increasingly eat into fixed-income returns. The $1.9 trillion stimulus package passed earlier this month in the U.S. came as many central banks have also vowed to keep rates near historic lows. At the same time, progress with vaccines has helped authorities lift lockdowns, spurring signs of a global economic rebound.
While Treasury yields have declined this week after Federal Reserve Chairman Jerome Powell played down the risk of unwanted inflation Tuesday, broader signals in recent weeks suggest market concerns may linger. A proxy for inflation over the coming decade rose to about 2.3% last week, the highest since 2013.
Investors longing for a sign it’s safe to pile back into their favorite risky bets for the year are becoming fixated with measures of bond volatility. As they wait for the extreme moves to subside, they’re cutting duration in fixed-income portfolios.
The ICE BofA MOVE index, a gauge which uses one-month implied price swings across different bond maturities in the U.S. Treasury market, has averaged the highest this month since April last year.
“In order to calm down markets and improve sentiment, we need to find a plateau where rates could stay for several days,” said Sergey Dergachev, senior portfolio manager for emerging-market debt at German money manager Union Investment.
Long-dated Treasuries led yields higher in recent weeks, with the pain spreading also to the belly of the curve. U.S. government debt of 25 years or longer have lost about 13% so far in 2021. Some investors such as Ray Dalio and Bill Gross are predicting more losses in Treasuries.
As a result, strategists are predicting large quarter-end rebalancing flows out of equities and into Treasuries. Bank of America strategists estimated that $88.5 billion could shift into U.S. fixed income, including $41 billion into Treasuries.
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The selloff put an end to the bull market in long-term U.S. Treasuries that began in the early 1980s. The Bloomberg Barclays U.S. Long Treasury Total Return Index, which tracks bonds maturing in 10 years or longer, has plunged about 20% since its peak in March 2020, putting the market in bear territory.
The jump in borrowing costs is spurring corporates globally into action. They’ve sold more than $740 billion of notes across currencies so far this year, the most ever for such a period. Shorter debt is hot, with over half of last week’s U.S. high-grade deals featuring two- or three-year tenors, offering investors a greater degree of protection from rising bond yields.
High-yield corporate bonds have also done far better than U.S. government debt or investment-grade notes from companies because of their larger spreads, which give them a buffer against rising yields. Asia high-yield dollar notes, which have even bigger yield premiums, have bucked the broader trend to make money.
Some non-U.S. dollar fixed income, such as European high-yield bonds, Chinese yuan debt, and a Japanese currency-based basket of investment-grade securities, are also still in the black. That compares with a loss of about 5% so far this year for U.S. investment-grade credit.
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