We may not be in a bond bear market, but we are in a bearish market for bonds. A dangerous one, even.
This has been clear for months: with minimal coupon protection, exceedingly long duration and super-tight credit spreads, the powder keg was fully loaded. Now we have sizzling inflation and hawkish central bankers providing us with the spark.
Some strategists are declaring we’ve entered a bear market for bonds already (or at least a “mini” version of that). The European Central Bank meeting last week was the latest policy surprise contributing to a rapid reassessment of where rates are headed. And credit spreads are widening at the same time as yields are rising, exacerbating losses.
But defining a bond bear market can be subjective. Do you go with yields? If so, which market? Which tenor? Ten-year Treasury yields may be the best option -- and it’s tricky to say the current pace or extent of increases is particularly abnormal there. The long-term downtrend for yields looks intact!
More Pain
Absolute returns give a clearer readout on the bottom line. The Bloomberg Global Aggregate Index had a negative return for the past six months, 2021 was its worst year since 1999 and this year has started off just as nastily. But we’ve seen bigger draw-downs from peak to trough before, in 2008 and 2016, for example. Could we get to a 20% drop? Maybe, but we’re currently only at -7.5%, so that would mean a lot more pain to come.
