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Analysis: Bond bear market? ‘Worst year in history’ for asset as inflation bites

U.S. One dollar banknotes have emerged before displayed stock graph in this illustration taken, February 8, 2021. REUTERS/Dado Ruvic/Illustration

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NY, Sept 2 (Reuters) – An accelerating decline in bond markets is bringing fresh pain for fixed income investors in per year when global bonds have previously lost a fifth of these value.

Yields on U.S. government bonds have surged since Fed Chairman Jerome Powell sent an unambiguously hawkish message to markets during August’s Jackson Hole symposium, with the ICE BoFA U.S. Treasury Index (.MERG0Q0) on the right track because of its worst annual performance on record. read more

Bonds in lots of Europe, meanwhile, marked their worst monthly performance in decades in August, helping send the closely watched Bloomberg Global Aggregate Bond Index(.BCGA) down around 20% from its peak for the very first time ever. read more

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“This is actually the worst year ever sold undoubtedly for fixed income,” said Lawrence Gillum, fixed income strategist for LPL Financial. “In the event that’s not just a bear market in bonds I have no idea what’s.”

The devastating sell-off in bonds had seen yields on the benchmark 10-year Treasury , which move inversely to prices, hit an 11-year saturated in June, rally alongside stocks on the summer and then sell off again, sparking fears that new lows could be coming.

While declines greater than 20% are usually called bear markets if they hit stocks, they’re virtually unknown in bonds, a secured asset class that emphasizes stability and reliable returns. From 1990 to its peak in January 2021 – an interval spanning a lot of a generation-long bull market in bonds – the global index had delivered an aggregate total return of nearly 470%.

Reuters Graphics

Many investors are betting the weakness in bonds will continue as central banks tighten monetary policy to create down inflation in the usa and around the world.

Investors broadly expect the Fed to improve rates by 75 basis points later this month, plus some believe an equally large hike could possibly be waiting for you from the European Central Bank in a few days. A U.S. jobs report on Friday can be being closely watched by investors. read more

Net bearish positioning among hedge funds along with other speculative investors is up 30% because the end of July, in accordance with Commodity Futures Trading Commission data.

Gregory Whiteley, a portfolio manager at DoubleLine, believes U.S. inflation, which showed signs of ebbing in the most recent consumer prices report, will probably persist, taking two-year yields to 4%. Longer-dated Treasuries, however, could be nearing a bottom, he said. read more

The Bloomberg U.S. Aggregate Bond Index (.BCUSA) is down 12.5% from its highs, a lot more than double any previous peak-to-trough decline heading back to the 1970s.

Reuters Graphics

Simeon Hyman, head of investment strategy at ProShares, has centered on top quality corporate credit and is underweight longer-dated Treasuries.

Hyman believes additional pressure on bonds could come because the Fed reduces its balance sheet, an activity referred to as quantitative tightening that hits its full stride in September because the central bank trims $95 billion per month from its holdings.

“Once you take the tiny little more hawkish tone from the chair and put that alongside the doubling of size of quantitative tightening, you need to tell yourself ‘there’s more room for interest levels to go up,'” he said.

Some investors think the recent sell-off is really a time and energy to buy bonds on the cheap, a bet that partially depends on the Fed slowing its policy tightening once it sees the U.S. economy starting to weaken.

Gene Tannuzzo, global head of fixed income at Columbia Threadneedle Investments, is betting declines in the housing marketplace and weaker car sales will be the first signs that the Fed’s rate hikes are filtering through the economy. He could be favoring high-grade corporate bonds and mortgage-backed securities.

Anders Persson, chief investment officer for global fixed income at Nuveen, is increasing Treasury positions, betting that yields are unlikely to go higher.

“Treasury markets did a quite good job of pricing for the reason that we won’t visit a Fed pivot any time in the future.”

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Reporting by David Randall; additional reporting by Dan Burns in NY and Dhara Ranasinghe in London; editing by Ira Iosebashvili, Megan Davies and Richard Chang

Our Standards: The Thomson Reuters Trust Principles.

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