Global Bond Index Loses $2.6 Trillion in Record Slide From Peak

Rising inflationary pressure around the world, amid surging commodity prices following Russia’s invasion of Ukraine, is also reawakening concerns about the ability of the global economy to weather any sustained period of higher financing costs as the pandemic drags on in many places. 

“The safe haven attributes of Treasuries have been undermined when one adds duration risk to the equation,” said Winson Phoon, head of fixed income research at Maybank Securites Pte. Ltd. 

The Fed raised interest rates by 25 basis points last week, and 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 damping the return on debt, eroded by the fastest pace of consumer-price increases in decades. Corporate bonds are particularly vulnerable to mounting stagflation threats, as slowing economic growth also raises credit risks.

Stocks have bounced back in recent days as more investors bet they will help hedge against inflation, but equities globally are still nursing losses of about 6% this year. 

“With the potential for seven rate hikes this year, the headwinds for fixed income remain heavy,” said Todd Schubert, head of fixed-income research at Bank of Singapore. “Investors will need to recalibrate return expectations and be nimble to exploit market dislocations.”

The retreat in both fixed-income and stock markets in 2022 is upending the dynamics of a classic 60/40 portfolio that is meant to balance out any losses from riskier share markets with the more stable cash flow of bonds.

The meltdown in global debt markets is a reminder of the Fed’s tightening cycle in 2018, though the broad global bond index wound up losing only 1.2% for that full year. But unlike four years ago, price pressures are now much stronger and the global supply chain is beleaguered. 

For emerging Asia, the threat of stagnant growth and accelerating inflation adds to the upside risk for yields, according to Australia & New Zealand Banking Group Ltd.. 

“We are likely to continue seeing upward pressure on yields as we expect monetary tightening in a number of Asian economies to start in” the second half of the year, said Jennifer Kusuma, senior Asia rates strategist at the bank.” 

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.