Global bond slump looks painful, but its nothing like the 2022 rout
While the latest pullback has driven yields to multi-year highs in the world’s biggest markets, the move is just a fraction of the one seen in late 2022. Global government bond yields have risen 17 basis points on a rolling 20-day cumulative basis, compared with 62 basis points back then, data compiled by Bloomberg show. On a peak-to-trough basis, bonds have lost 4.2% this year – a far cry from the 23% plunge seen in 2022.
While the current selloff is hardly showing any sign of letting up, the relatively modest move in yields so far is offering some reassurance to seasoned market watchers.
“While today’s volatility may feel disruptive, it is also improving the long-term opportunity set across fixed income markets,” said Mike Goosay, CIO and global head of fixed income at Principal Asset Management. The move higher in yields is “creating opportunities that have been largely absent for much of the past decade.” The 2022 rout had pushed global bonds into their first bear market in a generation. That came as central banks led by the Federal Reserve embarked on the most synchronised and rapid policy tightening in half a century, battling an inflation surge fueled by the post-pandemic rebound in demand and compounded by the war in Ukraine.
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While inflation is a key factor this time as well – given the Iran war and its impact on energy prices – other forces are adding to the pressure on bonds. Heavy government spending in major markets like Japan, the UK, France and the US is keeping debt issuance elevated, prompting investors to seek more compensation to own longer-maturity debt. At the same time, the vast amount of funds needed to finance the AI boom is intensifying the competition for capital and helping push borrowing costs higher. Even so, bond losses have been more contained in part because yields are rising from much higher levels, providing investors with a bigger income cushion against falling prices. By contrast, yields were near historically low levels heading into 2022.
“I can’t say that bonds are a screaming buy,” said Stephen Miller, a consultant at investment firm GSFM in Sydney who has covered debt markets since 1983. “At these sorts of yields, they do become worthy of some consideration by an income-oriented investor,” he said. Bonds in the Bloomberg Global Treasury Total Return Index carried an average coupon of 2.68% this year, up from 1.84% in 2022.Recent economic reports lend support to such a view. In the US, some key releases have disappointed, with payrolls declining in July and retail sales unexpectedly falling. Japan’s economy also grew less than expected in the second quarter.
To be sure, no one is firmly calling the peak in yields just yet.
The selloff in bonds may have room to run as energy-driven inflation keeps rate hike bets in play and heavy debt issuance adds upward pressure on yields. Rising Japanese yields are another potential source of strain as they risk drawing global capital back home.
