Saudi riyal, yuan, Turkish lira, pound, U.S. dollar, euro and Jordanian dinar banknotes are seen in this illustration.
In the first three quarters of the year, global bond funds saw the biggest outflows in two decades as interest rate increases by central banks to tame inflation sparked fears of a recession.
In the first nine months of the year, global bond funds had a cumulative outflow of $175.5 billion, the first net sales since 2002, according to Refinitiv Lipper.
The data shows that bond funds declined by 10.2% on average in their net asset values, their worst slump since 1990.
Governments and companies have borrowed heavily in the past few years, taking advantage of the low interest rates, and they now stare at larger interest liabilities due to a rise in yields.
The combination of high debt levels and a rise in interest rates has reduced investors' confidence in the government's ability to pay back debt, which has resulted in the massive outflows we are seeing, said Jacob Sansbury, CEO of Pluto Investing.
He said bond funds might continue into the year 2023, as a reduction in interest rates and reduced debt loads are unlikely to be a reality.
In the first three quarters of this year, emerging market bonds had an outflow of around $80 billion while U.S. high yield bonds and inflation-linked bonds saw net sales of $65.81 billion and $16.44 billion.
In the last quarter, iShares UK Gilts All Stocks Index UK D Acc recorded outflows of $6.67 billion, while the ILF GBP Liquidity Plus Class 2 and Vanguard U.K. Short Term Investment Grade Bond Index GBP Acc fund saw withdrawals of $2.16 billion and $993 million.
The largest money outflow from global bond funds in the third quarter came from bond funds.
Some funds managers said bonds looked attractive after the slump this year.
The ICE BoFA U.S. Treasury Index has fallen 13.5% this year, while the Bloomberg Global Aggregate Bond Index has shed about 20%.
Jake Remley, portfolio manager at Income Research Management said that the yield cushion now protects the investor against negative total returns more than it did at the beginning of the year.
Even if interest rates go up as they have over the past 9 months, this almost certainly makes the prospects for bonds better between now and year-end. The yields on 2 year and 10 year U.S. Treasury bonds were around 4.12% and 3.68% on Wednesday, compared with 0.7% and 1.5% at the beginning of the year.
The yield on the ICE BofA U.S. High Yield index, the common benchmark for the junk bond market, was 9%, compared to 4.3% at the beginning of the year.
Ryan O'Malley, portfolio manager at Sage Advisory Services said that bonds have become the 'babies thrown out with the bathwater' and offer compelling value at these levels.
It is important to note that there will likely be more credit stress in many corners of the bond market, and risk management is a priority in these uncertain times.