- In the presence of an Old enemy - inflation - the global bond investors face an old enemy and the universe of fixed-income assets doesn't look to offer much in the way of shelter.
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U.S. Treasuries, European sovereigns, U.K. currency notes and emerging-market credit will all lose money over the 12 months of September as rising coupons provide little cushion against dwindling yields, according to forecasts from Bloomberg Intelligence. Adding to the potentially toxic environment for bonds is the prospect that major central banks will unwind debt purchases and raise interest rates.
Government and corporate bonds have already lost 4.4% this year, the biggest decline for any similar period since 2005, according to a Bloomberg index.
The problem now is where is income in my fixed income? Damian Sassower, chief news strategist at Bloomberg Intelligence in New York, said Bloomberg intelligence in New York.
Inflation expectations are being driven higher by a spike in energy costs, supply-chain disruptions and the impact of central-bank stimulus. The U.S. 10 year break-even rate, which shows investors forecasts of inflation over the period, climbed to 2.57% last week, just a touch below May's 8-year high of 2.59%. Brent crude has risen to around $85 a barrel, the highest level in three years.
While inflation is eroding the value of bonds fixed payments, central banks are pulling back on debt purchases. The Federal Reserve intends to start selling more of its $120 billion of monthly assets in November or December, according to the minutes of its September meeting released last week.
The sovereign debt markets are unlikely to be affected. U.S. Treasuries have sent investors a loss of 2.7% this year, according to Bloomberg indices based in dollars. The figure in the U.K. fell 8% and in Europe 7.5% fell.
Bond King Bill Gross sees yields rise further. The U.S. 10-year yield will rise by 2% over the next 12 months from the current level of around 1.60%, wrote Pimco President Wayne Geck in an investment outlook last week.
Markets have likely seen their secular, long-term lows of interest rates, and the outlook for rising yields is likely to provide a maximum sign in front of 2022 total returns for bond holders, he said.
Still, many people, including Gross, have attempted to put an end to the more-than 30 year global bond market bull market, only to see the securities resume their rally.
Economists and market participants interviewed by Bloomberg predict that U.S. 10-year yields would climb to 2.04% by the end of September and reach 1.96% by December 2022.
Slowing growth in the U.S. together with largest increase in consumer price index since 2008 raised concerns about stagflation, which would pummel both bonds and stocks. Citigroup surprise indexes show that expectations for international inflation are beating expectations by a record while a similar gauge of growth has dropped in all but one of the last 18 weeks.
Not everyone is negative on the outlook for fixed-income assets.
Bond yields may rise in the coming months but are likely to fall back again due to low growth and concern about high government debt levels, according to Capitulum Asset Management GmbH.
If rates spike between now and year-end, you have to buy a dip on bonds, said Lutz Roehmeyer, chief investment officer at the Berlin-based company. We are likely to live with low monetary policy for the long term. This keeps me very confident that rates will not rise too high It s actually a perfect environment for active bond managers, said Roehmeyer, whose local-currency and hard-currency emerging-market funds have returned 5% to 6% in the past year, according to data compiled by Bloomberg.
In 2021, China's government bonds had returned 5.5% amid speculation slowing growth in the world s second largest economy will spur the central bank to ease policy further. High-yield corporate debt has also outperformed, cushioned by their generous coupon, with stocks in the U.S. rising to 4.3% this year.
The challenging environment for global bonds means money managers will struggle to deliver positive returns unless they add off-benchmark risk or focus exposure in less liquid markets, Bloomberg Intelligence s Sassower said.
You have to be far more selective, far more flexible, and you have to open up your policy constraints to allow yourself to invest in off-the-battle mark securities where you can get higher yield, with perhaps mis-priced risk, he said. Just buying a positive aggregate bond index for global returns is not going to cut it any longer. How Do You Think It Does Not Take Trump, Elon Musk, and Gwyneth Paltrow 5 Minutes to Frame Your Rational Thinking?
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