Global bond market losses have risen sharply as central banks, including the Federal Reserve, seek to tighten policy in response to rising inflation, according to Bloomberg.
The Bloomberg Global Aggregate Index, a measure of government and corporate debt, has dropped 11% since its peak in early 2021. This is the largest drop from a peak in data dating back to 1990, surpassing a 10.8 percent drop during the 2008 financial crisis.
The Fed raised interest rates by 25 basis points last week, and Chair Jerome Powell said this week that the Fed is ready to raise rates by a half percentage point at its next meeting if necessary. Higher borrowing costs risk dampening the return on debt, which has already been eroded by the fastest rate of consumer-price increases in decades.
"A high volatility regime should remain in place in the coming months as the situation on the geopolitical and economic fronts remains fluid," said Norman Villamin, chief investment officer wealth management at Union Bancaire Privee, adding that investors should focus on credit quality and stay short duration.
It's a setback for money managers who have become accustomed to years of consistent gains bolstered by easy monetary policy. Stocks are in a bear market, upending the dynamics of a traditional 60/40 portfolio, which is designed to offset any losses from riskier equities with the more stable cash flow of bonds.
60/40 Portfolio is down more than 10% this year, Leaving it on pace for the worst drubbing since the financial crisis of 2008.
The rallies of recent years were a boon to 60/40 portfolios, with rock-bottom interest rates pushing up both bond prices and stock valuations, particularly those of high growth companies.
The mix delivered an average return of 18% from 2019 through 2021, according to data compiled by Bloomberg. Since 2000, the inflation-adjusted return has been around 7.5% on a rolling 12-month basis, according to Morningstar.
Prior to 1999, data on the Bloomberg Global Aggregate Index was monthly rather than daily, and aggregate index constituents and duration fluctuated. Fixed-income investors can continue to profit by betting against bonds.