The Bloomberg Global Aggregate Total Return Index of government and investment-grade corporate bonds has fallen more than 20 per cent from its 2021 peak on an unhedged basis, the biggest drawdown since its inception in 1990. Officials from the US to Europe have hammered home the importance of tighter monetary policy in recent days, building on the hawkish message from Federal Reserve Chair Jerome Powell at the Jackson Hole symposium.
The elevated inflation the world now faces means central banks won’t be prepared to re-introduce the sort of extreme stimulus that helped send Treasury yields below 1 per cent, he said. European bonds have been hit hardest this year as Russia’s invasion of Ukraine sends natural gas prices soaring. That includes the UK: a Bloomberg index tracking investment grade sterling bonds also fell into a bear market this week.
The switch in much of the world from unprecedented easing to the steepest rate hikes since the 1980s has dried up liquidity, according to JPMorgan Chase & Co. Other central bankers at Jackson Hole, from Europe to South Korea and New Zealand, also indicated that rates will continue to rise. Still, fixed-income investors are showing plenty of demand for government bonds as yields rise, aided by lingering expectations that policy makers will need to reverse course should economic slowdowns help cool inflation. In the US, options markets are still pricing in at least one 25 basis-point rate cut next year.
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