Global bonds look set to enter a bear market after the inflation in the US. The fastest in four decades has fueled the fear of the most significant interest rate hike since 1994 by the Federal Reserve this week.
More On It
Total returns from investment-grade corporate bonds and government bonds tracked by the Bloomberg Global Aggregate Index declined by 19.7 % since January 2021 record high. Debt markets have been convulsing since Friday after a report revealed that the annual inflation rate in the US accelerated to 8.6%. The two-year Treasury bond yields have climbed by more than 50 basis points over the past week touching the highest level since 2007.
The fixed income instrument sell-off has resulted in almost $10 trillion in market value being wiped off in the global bonds in 2022, erasing the gains made during the cushioning of the global economy by the central banks in the once-in-a-lifetime pandemic.
The global bond index has already declined by more than 16% this year, three times more than the biggest annual loss since 1990, after commodity prices surged due to a supply chain crunch and renewed consumer demand. This surprised the central bankers since they have been playing the catching game on inflation.
Jerome Powell, the Federal Reserve Chairman, has been trying to telegraph policy moves carefully to the market and is under pressure to hike rates to control inflation and tame price pressure during the rate review on Wednesday.
An estimate Friday from the University of Michigan has signaled risks that see unanchored long-term inflation expectations and impetus to demand more aggressive interest rate hikes.
According to Thu Ha Chow, the fixed income head at Robeco Singapore Private Ltd, the market is worried that the Federal Reserve is behind the curve and inflationary expectations will be embedded in the long-term. He said it was better to front-load an increase of 75 basis points rather than leave it for more concerns about the need for hikes in future rounds.
