The Bloomberg Global Aggregate Bond Index (unhedged), which measures the state of the world's bond markets, is down about 21% from a year ago.
To put this into perspective, a rout like this has not affected global fixed income investors since official data collection started in 1990.
Even the 10% drawdown experienced during the global financial crisis has been surpassed.
Additionally, the broad market index for stocks has declined by 23% for the year, reflecting the overall decrease in equities. Since the start of the aggregate bond index in the middle of the 1970s, we have not experienced a year when both equity and fixed income were down.
The bond markets have taken the brunt of the impact of central bankers being caught off guard by escalating inflationary pressures. The skyrocketing inflation has been driven by historically tight labor markets, rising commodity prices as a result of the conflict in Ukraine, and Covid lockdowns in China.
Depending on the source, Vanguard says bonds saw their worst first-half performance "since either before the Civil War or George Washington was president."
Why are bonds performing so poorly? There could be a few reasons.
The strong tightening of repricing
Investors are currently anticipating rate increases through the end of the year, with the so-called dot plot showing interest rates will likely reach 4.4% by December, above the 3.4% projected in June, and will continue rising to 4.6% next year.
Portfolio protection is becoming more important
High-quality fixed-income investments often perform better in this climate as recessionary worries increase.
The U.K. has entered a recession as a result of the possibility that Europe's energy supply may be cut off more abruptly than anticipated.
Demand from institutions should be strong
After years of struggling with paltry yields, this year's dramatic increase in rates is likely to result in brisk demand from insurance and pension funds.
Many institutions will now be eager to lock in the recent rate increase to offset longer-term liabilities because of their favorable financing status.
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