Global bonds are currently in their first bear market in the last 30 years as a result of the relatively swift increase in interest rates supported by central bankers battling inflation in several parts of the world.
The consistently high inflation brought on by the global COVID-19 outbreak is the primary reason for the precarious status of the typically secure fixed income business. The Bloomberg Global Aggregate Total Return Index has decreased by 20% from its peak in 2021. According to UBS Global Wealth Management's chief investment officer, Mark Haefele, European government bond prices recently had their worst month on record.
Most significant central banks, with the exception of Japan's central bank, are under pressure to swiftly raise borrowing costs: The biggest banks on Wall Street anticipate a 75 basis point rate hike from the European Central Bank the following week, while the Bank of Canada shocked the markets with a 100 basis point hike in July and is anticipated to soon push borrowing costs into restrictive territory.
Bonds are the asset class that is most harmed by inflation, which lowers investors' fixed returns. As investors sell their bonds, their prices fall and their yields rise. For instance, the 2-year Treasury's policy-sensitive rate is not far from its 15-year high. As of Friday, the 30-year rate had risen by 132.7 basis points, while the 10-year yield had risen by 156.2 basis points from January's low.
As a result of the Federal Reserve authorities lifting the aim on their key policy rate to a range between 2.25% and 2.5% from virtually zero, the large-cap benchmark S&P 500 entered a bear market in 2022. With a decline of roughly 5,563 points, or 15.3%, during the course of the first two quarters, the Dow industrials had its worst performance since the COVID-19 outbreak in the US in early 2020, while the S&P 500 and Nasdaq Composite both declined by 20.6% and 29.5%, respectively.
According to trader and strategist Faranello, those who "had been investing in fixed income systematically, and were compelled to acquire negative-yielding debt" are those who have been hurt the most by the bear market in the global bond market. However, the current situation is a very appealing opportunity to get engaged for investors who have been patiently observing from the outside.
Despite the possibility of increased rates and a slowdown in economic development, the selloff in bonds over the past year has occasionally been mitigated by ongoing demand from buyers. That was the case on Friday with Treasurys, which remain an investment of choice for many investors, particularly with 6-month through 30-year yields all still above 3%.
Investors that "had been investing in fixed income systematically, and were obliged to acquire negative-yielding debt," according to trader and strategist Faranello, are the ones most harmed by the global bond market's bear market. "However, for investors who have been patiently watching from the sidelines, the current environment is a very attractive time to get involved."