The Worst Loss in Global Bond Market History... Losses Exceed Those of the 2008 Financial Crisis

Bloomberg Aggregate Bond Index Falls Over 11% Since January High Last Year
Inflation and Tightening Cause Larger Drop Than 10.8% During 2008 Global Financial Crisis

[Photo by AP Yonhap News]

[Asia Economy Reporter Park Byung-hee] Major foreign media reported on the 23rd (local time) that the global bond market is experiencing the worst losses in history due to worldwide inflation and monetary policy tightening.

The Bloomberg Global Aggregate Bond Index has fallen more than 11% from its peak in January last year. This decline rate is greater than the 10.8% drop during the 2008 global financial crisis. It is also the largest decline since the index began being calculated in 1990.

The bond index has sharply declined this year. This is because central banks of major countries, including the United States, have expressed their intention to raise benchmark interest rates to curb rising inflation.

The U.S. central bank, the Federal Reserve (Fed), decided to raise the benchmark interest rate last week for the first time in over three years. There are also forecasts that the Fed will raise the benchmark interest rate at all remaining monetary policy meetings this year. The Bank of England has also raised its benchmark interest rate three consecutive times since December last year. Fed Chair Jerome Powell hinted at the possibility of a 'big step' of a 0.5 percentage point rate hike at once during the National Association for Business Economics (NABE) event on the 21st. The European Central Bank (ECB) recently expressed its intention to accelerate the end of bond purchases at its monetary policy meeting.

The war between Russia and Ukraine also appears to be a factor causing bond prices to fall. While the war itself is a negative factor for the global economy and could lead to rising bond prices as a safe asset, this war is instead causing bond prices to drop. This is due to concerns that reduced supply of Russian crude oil and natural gas will push up oil prices, thereby stimulating inflation. In fact, central banks have recently shown tightening moves, citing inflation concerns caused by the war.

Mike Riddle, Senior Portfolio Manager at Allianz Global Investors, diagnosed that the bond investment environment has fundamentally changed due to severe inflation. He said, "For the past 20 years, we have been in an environment where central banks would immediately ease monetary policy when growth slowed, but now central banks are deciding to tighten monetary policy even at the risk of a recession."

The yield on the U.S. 2-year Treasury note was 0.73% at the beginning of the year but surged to 2.2% this week, the highest in three years. If this condition persists, the 2-year Treasury will record the largest quarterly loss since 1984. The yield on the U.S. 10-year Treasury also reached 2.42% on the 23rd, the highest since May 2019.

The Bank of Japan (BOJ), Japan's central bank, is expected to maintain its monetary easing policy, going against the global tightening trend. However, Japanese government bonds are also recording losses this year.

Tatyana Greil Castro, Manager at investment firm Muzinich & Co., said that with bond prices falling regardless of region, investors have nowhere to escape.

As bond prices fall overall, there is analysis that the classical asset allocation principle of 60% stocks and 40% bonds is also being shaken. This investment strategy allocates 40% of assets to bonds to seek stable returns while aiming for additional returns from stocks, but losses in bonds, which should guarantee returns, are causing fundamental difficulties in asset allocation. Eric Fine, Portfolio Manager at Van Eck, said, "With funds flowing out of all funds including government bonds, the 60/40 asset allocation principle is facing a major crisis," adding, "This is a situation that neither investors nor analysts have experienced before."

This content was produced with the assistance of AI translation services.