Compared to the bond bear market of 1994, in many ways today is worse. Economies around the world have been aggressively raising rates to combat rapidly growing inflation. While 1994 cash rates were low they were nowhere near as low as they were at the start of 2022 – almost zero across most major economies. This meant that when bond prices fell in 94, the income from coupons was healthier and provided a cushion for capital losses.
The smaller coupon buffer present today has made returns in this market that much more difficult. Higher issuance in recent years, thanks to years of such accommodative policies, added fuel to this fire.
Still, while bond bears can be savage, they can also be quick to reprice. We are already seeing an inversion of the curve, which shows a peak in rates is potentially coming (within the next 12 months). Higher rates also mean the ability to generate total returns can be easier (with yields closer to 4%) than when the bear market began (with yields close to zero).This means returns from bonds and bond funds, should be able to claw back the losses from earlier this year, although it will still take some time.
In this environment, credit defaults may pick up. As such select developed government bonds look attractive – like Australia, Canada and the Scandinavian countries – along with opportunistic plays in emerging market local currency debt. As the bond recovery happens there may be opportunities in investment grade credit and then later high yield, but this may be 9 -12 months out.
Paul Brain, manager of the BNY Mellon’s Global Dynamic Bond strategy and Howard Cunningham, fixed income portfolio manager, Newton Investment Management
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