Bonds are sliding toward the first bear market in a generation, burning investors who erred in bets that central banks would pivot away from rapid interest-rate hikes.
The Bloomberg Global Aggregate Index, which tracks total returns from investment-grade government and corporate bonds, is within a percentage point of falling 20% from its peak after another bout of selling following the Federal Reserve’s Jackson Hole symposium.
The hopes of a dovish shift that drove a rebound through June and July have evaporated since Fed Chair Jerome Powell committed to higher rates for as long as it takes to tame inflation. Bond investors, who were already on shaky ground in recent weeks as policy makers flagged price pressures, face further risks from US payrolls data on Friday and inflation figures two weeks from now.
“Powell’s comments on Friday reset expectations,” said Pauline Chrystal, a portfolio manager at Kapstream Capital in Sydney. “Our view prior to Jackson Hole was that the market was pricing cuts too early.”
It’s a particularly difficult environment for investors, with bonds and stocks sinking in tandem this year. MSCI Inc.’s index of global equities has lost 16% so far this year on a total return basis. The Bloomberg bond gauge lost 19.3% as of Monday from its record high in January 2021.
Powell’s hawkish stance has swaps traders now seeing around 65% odds that the Fed will deliver a third-straight hike of 75 basis points when it meets in just over three weeks. Other central bankers at Jackson Hole, from Europe to South Korea and New Zealand, indicated that rates will continue to rise at pace.
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Surging energy prices, driven by both the impact of Russia’s invasion of Ukraine and the strains imposed by extreme climate events, are acting to keep cost pressures elevated around the world, even as they also weigh on growth.
UK and German two-year yields -- the most sensitive to changes in monetary policy -- are poised to rise by the most on record this month as traders bet the Bank of England and European Central Bank will continue to raise borrowing costs in order to quell inflationary pressures.
The Fed’s accelerating efforts to trim its balance sheet are adding more weight to bond prices. Kozo Koide, chief economist at Asset Management One Co. in Tokyo, warned that Powell may take rates even higher than current market pricing suggests.
“Because wages are rising so fast, you can’t stabilize inflation around 2% without boosting unemployment and causing a recession, even though the Fed can’t openly say so,” said Koide. He estimates that the Fed rate may go above 4.75% if inflation stabilizes at around 3%, given the central bank has estimated the potential inflation-adjusted growth rate is around 1.75%.
Corporate bond spreads globally are also widening after the summer rally, and were higher again at the start of the week, a Bloomberg index shows. They have climbed for two straight weeks, the data show.
“Any lingering hope of an earlier-than-expected Fed dovish pivot has been extinguished,” said Todd Schubert, head of fixed-income research at Bank of Singapore. “The movement wider in credit spreads globally is a result of Powell’s uber-hakwish Jackson Hole speech.”
This article was provided by Bloomberg News.