Treasuries Haven’t Started a Year This Badly in Four Decades

 

(Bloomberg) — Six weeks into 2022 and it’s shaping up to be a grim year for fixed-income investors facing rising interest rates around the world.

With the Federal Reserve preparing to hike rates next month after a bigger-than-expected jump in U.S. consumer prices, Treasuries have endured their worst start to a year in more than four decades.

But the selloff goes much further, encompassing developed markets, corporate bonds and higher-yielding securities from emerging economies.

“Fixed income is a pain trade, that’s for sure, and we are not going to extend duration anytime soon,” John Woods, Credit Suisse Group AG’s chief investment officer for Asia-Pacific told Bloomberg Television on Friday.

Data showing U.S. inflation accelerated to a 40-year high of 7.5% in January has added to the pain by stoking investor expectations that the Fed could move interest rates off their ultra-low level more aggressively than usual.

Goldman Sachs Group Inc.’s economists expect the Fed to raise rates seven times this year to contain surging inflation, up from the five hikes they had seen earlier.

Two-year yields have been surging and 10-year yields have climbed above 2%.

“We have a low interest rate environment coupled by high inflation and the fact that the Fed is about to take away the monetary accommodation,” Katerina Simonetti, senior vice president at Morgan Stanley Private Wealth Management, told Bloomberg Television.

The Bank of England is also forcefully raising interest rates, and even European Central Bank President Christine Lagarde is no longer dismissing such a move.

It’s a worry “for investors who are looking at their portfolios, looking at their diversification and wondering whether there is any place to hide,” Simonetti said. They are considering “how they can make sure that the real returns of their portfolios, the inflation adjusted returns of their portfolio, is adequate to maintain their standard of living.”

The outlier is China, where policy easing to counter an economic slowdown has helped the Bloomberg China Aggregate Total Return Index, a yuan-denominated bond index, climb 1% in 2022.

Although the returns on Chinese debt are positive, its property industry crisis has crimped debt sales in the word’s second-largest economy. The prospect of more expensive funding has also weighed on other potential borrowers in Asia.

Chinese dollar-bond sales had the weakest start to the year since 2019, with roughly $18 billion so far in 2022. Dollar bond borrowing from Asia outside Japan is also running at their slowest pace since 2019, totaling just over $36 billion, data compiled by Bloomberg show.

“Stresses and defaults in China property have been weighing on a usually prolific segment of Asian issuers,” said Wei Liang Chang, a macro strategist at DBS Bank Ltd.

Investors looking for cover from the bond market rout can take little solace in stocks.

The Fed’s expected tightening is spelling losses for a bedrock of long-term investing, a portfolio split 60/40 between equities and high-quality bonds.

A gauge reflecting that asset allocation in the U.S. is heading for its worst quarterly slump since the pandemic market tumult of 2020.

©2022 Bloomberg L.P.

 
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