US investors return Tuesday from the Presidents’ Day holiday to find the reflation trade in full force and global bond markets in retreat. How bad can it get for fixed-income investors, and where can they find solace?
It’s the worst start to a year for the Bloomberg Barclays Global Aggregate Index since 2013. Bonds fell in the first months of that year even before the so-called taper tantrum, when then-Federal Reserve Chairman Ben Bernanke triggered a jump in yields by suggesting the central bank could begin to reduce asset purchases.
Former New York Fed President William Dudley last week outlined reasons why the US central bank might have to pull back on stimulus sooner and with greater force than anticipated to keep inflation in check, potentially triggering a new wave of volatility akin to the taper tantrum. Many households have cash to spend and the recovery should be faster than the last one, he wrote.
Treasury 10-year yields rose to 1.24% Tuesday, their highest since last March, while the spread between them and two-year yields reached the steepest since April 2017. Ten-year break-even rates entered the week at the highest since 2014.
Long duration bonds are losing the most this year, with the Bloomberg Barclays 5-10 year U.S. Treasury index returning -1.2%, while over 20-year maturities have returned -6.8%, the worst start to a year since 2009.
Globally, bonds maturing in under five years have lost less than 0.3%, while maturities in excess of 10 years have lost about 3.9%, according to the Bloomberg Barclays Global Aggregate Index.
Bonds from UK and Austrian issuers are some of the biggest losers in 2021, with Austrian notes losing more than 3%, according to data compiled by Bloomberg. That nation’s 100-year euro-note due in 2120 has declined about 18% this year to 107.5 euro cents on Tuesday. UK gilts due in 25 years and more are down more than 10% year-to-date.
By contrast, debt of Chinese issuers is outperforming notes of other nations’ borrowers, giving investors gains of 1.4% this year.
While still losing money in 2021, corporate bond returns overall are beating government debt. They’ve lost about 1.8% so far this year, the Bloomberg Barclays indexes show. Investors in junk dollar bonds are among the few winners in fixed-income markets this year.