Since hitting their peaks last year, stocks and bonds have been hemorrhaging amid soaring inflation, rising interest rates, and war in Eastern Europe.
The leading U.S. benchmark indexes are deep in the red year-to-date. The Dow Jones Industrial Average has slumped about 9 percent, the Nasdaq Composite Index has plunged 20 percent, and the S&P 500 has tumbled nearly 13 percent.
Despite several U.S. Treasury yields hitting multi-year highs, many of the top bond exchange-traded funds (ETFs) are not performing any better.
So far this year, the iShares U.S. Treasury Bond ETF has slipped roughly 8 percent. The iShares International Treasury Bond ETF has fallen close to 14 percent. The SPDR® Bloomberg International Treasury Bond ETF has dropped 14 percent.
Corporate debt has also slumped this year. The iShares iBoxx $ Investment Grade Corporate Bond ETF has slipped nearly 14 percent, while the Goldman Sachs Access Investment Grade Corp Bond ETF has slid approximately 13 percent.
The Bloomberg Global Aggregate Index, a benchmark for government and corporate debt total returns, shed 4.9 percent in April, the biggest monthly decline since it first launched in 1990. After hitting a top in 2021, the index has lost about $2.6 trillion.
Overall, investing in a traditionally safe-haven asset has not been ideal as of late, says Steven Jon Kaplan, CEO at True Contrarian Investments LLC.
“Bond investing in general has been very unpopular recently, both in the U.S. and globally, with the ratio of bond to stock ownership worldwide at its lowest point since 2008,” he told The Epoch Times.
“It’s not just U.S. government bonds which are out of favor. If you look at charts of emerging-market bond funds including LEMB, ELD, PCY, and TEI, then those are all trading near two-year lows.”
Indeed, Bank of America data show that the average weekly outflow of investment-grade and high-yield bonds had been about $20 billion in March, compared to $25 billion in equities.
Over the last two years, investors had been pouring into equities as interest rates were near zero and trillions of dollars worth of fiscal and monetary stimulus were pumped into the financial system. This led traders to think that they did not need “boring” bonds, added Kaplan.
“People were convinced that they could remain Bogleheads forever, keep piling into large-cap U.S. growth stocks, and ‘easily’ make 15 percent or 20 percent each year,” he said. “Many investors have completely forgotten about bonds and their critical role in diversifying any portfolio.”
Market analysts are split if the selloff has peaked or if there is more room for declines.
The bond market is unlikely to continue enduring a “wreckage,” according to Saria Malik, chief investment officer at Nuveen, the asset manager of TIAA.
“Investors aren’t used to seeing dramatic losses in their bond portfolios, particularly when equity markets are also declining sharply,” Malik wrote in a research note to clients on Monday, adding that investors could begin witnessing value from the slump.
With central banks worldwide winding down their pandemic-era stimulus and relief measures, fixed-income markets might see more value while also coming to grips with multiple headwinds, Pimco warns.
“The rapid monetary tightening priced in by markets has created more value in fixed income markets, but the asset class still faces the headwinds of high inflation, robust growth, and increasing government bond supply as central banks begin to unwind their balance sheets,” wrote Erin Browne, Geraldine Sundstrom and Emmanuel Sharef, portfolio managers for asset allocation at Pimco.
Looking ahead, the performance of the global bond market for the rest of the year and in 2023 will be primarily “policy dependent,” says Thomas Urano, Principal and Managing Director at Sage Advisory Services, an investment firm based in Austin, Texas.
“Our base case is economic growth slows faster than the Fed can raise rates, which suggests rates may have outpaced the Fed,” Urano told The Epoch Times. “However, it’s prudent to remain cautious in the coming quarters. Recession risk and quantitative tightening by the Fed could lead to a short-term spike in bond market risk premiums in 2H22.”
However, the silver lining in all of this is that negative-yielding bonds could be a thing of the past, Urano noted.
“The good news is that negative-yielding debt is quickly becoming a thing of the past. Globally rates are rising and yields are looking attractive for a variety of investor types,” he said.
A subzero bond yield is when holders receive less money at the bond’s maturity than the original purchase price for the debt vehicle. This occurs when central banks maintain low or negative interest rates. Today, the 1-year German government bund yields -0.22 percent. Japan has three debt securities trading below zero: 3-month (-0.153 percent), 2-year (-0.049 percent), and the 3-year (-0.038 percent).
Still, is this the worst time to own stocks and bonds?
Billionaire hedge fund manager Paul Tudor Jones believes this is a terrible environment for financial assets now, telling CNBC that the Federal Reserve has “inflation on the one hand, slowing growth on the other, and they’re going to be clashing all the time.”
“I think we’re in one of those very difficult periods where simple capital preservation is, I think, the most important thing we can strive for,” he added. “I don’t know if it’s going to be one of those periods where you’re actually trying to make money.”
Many experts agree that there is plenty of uncertainty surrounding monetary policy if there is little growth and above-target inflation amid the tightening cycle.
The U.S. central bank will complete its two-day Federal Open Market Committee (FOMC) policy meeting Wednesday. According to the CME FedWatch Tool, it is almost guaranteed that the institution will pull the trigger on a 50-basis-point rate hike. The market also anticipates that the Fed will raise rates by another half a percent at the June meeting.
Fed Chair Jerome Powell and his colleagues could begin to trim its $9 trillion balance sheet. Minutes from the last meeting revealed that officials planned to cut $95 billion a month in assets.
The Bank of England (BoE) is also poised to raise its benchmark interest rate to its highest level in 13 years on Thursday. At the same time, BoE chief Andrew Bailey purported that the organization will partake in a juggling act between fighting price inflation and averting recession risks.
The U.S. Treasury market was mostly red on Tuesday, with the benchmark 10-year yield dipping to 2.93 percent. The one-year bill edged up to 2.076 percent, while the 30-year bond fell to 2.993 percent.