Global bond markets posted a strong rebound in the first two weeks of 2023, boosting investors’ hopes that last year’s fixed-income slump is over.
Bonds are on track to post their best January in more than three decades, spurred by the growing belief that inflation has peaked on both sides of the Atlantic.
The Bloomberg Global Aggregate Index, a broad measure of global fixed income, has returned 3.1 percent so far this month. If that holds for the rest of January, it would be the biggest rise ever recorded in the first month of the year in records going back to 1991. The index fell more than 16 percent in 2022.
“It’s like day and night,” said Richard McGuire, fixed income analyst at Rabobank. “Last year was historically bad, but there are every signs that this will be much better for bond investors. Growth is slowing, inflation is slowing and we are confident that the peak in monetary policy rates has already been priced in.”
Investors are betting that the Federal Reserve and European Central Bank will move more slowly this year in their efforts to tame rising rates, after both central banks helped upend debt markets last year by raising interest rates at an unprecedented pace.
At the same time, the looming specter of recession may dampen the appetite for riskier assets like equities, and instead attract large flows of money into the safety of highly-rated companies. government debt.
The gains — driven by a sharp rise in long-term government debt — are an early proving for fund managers who in December preferred bonds in their portfolios over other asset classes for the first time since 2009, according to closely watched Bank of America monthly. Investor survey.
The 10-year US Treasury yield fell to 3.46 percent, from 3.83 percent at the end of 2022, reflecting higher prices. Germany’s 10-year yield, a benchmark for the eurozone, fell from 2.56 percent to 2.10 percent in the same period.
Data in the first week of January shows that inflation in the eurozone fell faster than expected last month as energy prices fell, helping to spur a rally in global bonds. Meanwhile, this week’s confirmation that Inflation has fallen in the United States to its slowest pace in more than a year at 6.5 percent in December, which helped fuel gains.
Public investors have already begun betting that the Fed will start cutting interest rates later in 2023 as the US economy slows, despite repeated statements by central bank officials that borrowing costs may remain high for some time to curb inflation.
But even if rate cuts don’t materialize, some investors argue that falling inflation reduces uncertainty about more big hikes, which should benefit long-term bonds as well as riskier types of debt.
“The Fed will eventually reach a plateau,” said Stephen Abrahams, head of strategy at Amherst Pierpont. “At some point this year, major shifts in federal funds will be off the table, which should reduce interest rate volatility measurably. With lower volatility, risk assets, mortgage-backed securities and corporate credit should all do well.” .
There is also widespread hope that bonds will regain their traditional role as a safe haven from the next economic downturn and should gain if stock markets suffer. That would be a break with the simultaneous sell-off in 2022 when bonds fell even though the MSCI All-World stock index was down nearly 20 percent.
“It’s very rare to have a significant decline in both stocks and bonds, and last year was the first time since 1974 that they both went down,” said David Kelly, chief global strategist at JPMorgan Asset Management. “It usually bounces back the next year, and I think that’s what’s happening now. It’s not the best of times, but it’s not the worst of times either.”
Others are detecting a whiff of complacency in the bond market rebound. Markets’ belief that interest rates are nearing their peak, and cuts are on the way, collides with central banks’ newfound insistence that they will do whatever it takes to quell inflation, according to Mark Dowding, chief investment officer at BlueBay Asset Management.
“We suspect that the relatively strong market conditions at the beginning of 2023 can last for a very long time,” Dowding said, adding that he is “worried by the narrative in the markets that we don’t need to listen to central banks, as it doesn’t matter much.”
“This may sound satisfactory and we learned in 2022 how quickly underlying conditions can change.”