As central banks move to normalize policies, bond investors are losing money far too easily
Last week, central banks started issuing signals of policy normalization, which shook up financial markets. They also had an impact on bond investors who, in the current low-interest environment, have little insulation against rising yields.
“Returns on bonds come from two sources: the interest income that accrues to holders and changes in bond prices,” said columnist Richard Barley in a piece for the Wall Street Journal. “But years of zero-interest-rate policy have drastically reduced the former, making the latter far more important.”
Because of that shift, bonds are not behaving as the reliable investments they have been traditionally. Barley pointed to Germany as an example.
“The country’s benchmark 10-year bond pays a coupon of 0.25%, and at the start of last week was priced nearly close to par, with a yield of 0.25%,” he said. “By the end of the week, it yielded 0.47%, but the bond’s price had dropped by around 2%, data from Tradeweb show.”
In other words, Barley said, the downward price move in one week was comparable to eight years’ worth of income.
He further noted that yields on all German government bonds maturing out to the start of 2024 are still negative. Citing index data from Bank of America Merrill Lynch (BAML), he said the German bond market as a whole has returned -1.9% year-to-date. Spain is the only Eurozone economy in positive territory, managing a 0.1% return.
Even the US, where higher bond yields provide a little breathing room, wasn’t spared. According to Barley, last week’s swing still knocked down year-to-date returns to 1.9% on the BAML index, where only a week earlier the returns were at 2.7%.
“Even if yields don’t surge higher from here—with forces like demographics, regulation and still-soft inflation weighing on the market—the outlook for returns is hardly inspiring,” Barley said.
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“Returns on bonds come from two sources: the interest income that accrues to holders and changes in bond prices,” said columnist Richard Barley in a piece for the Wall Street Journal. “But years of zero-interest-rate policy have drastically reduced the former, making the latter far more important.”
Because of that shift, bonds are not behaving as the reliable investments they have been traditionally. Barley pointed to Germany as an example.
“The country’s benchmark 10-year bond pays a coupon of 0.25%, and at the start of last week was priced nearly close to par, with a yield of 0.25%,” he said. “By the end of the week, it yielded 0.47%, but the bond’s price had dropped by around 2%, data from Tradeweb show.”
In other words, Barley said, the downward price move in one week was comparable to eight years’ worth of income.
He further noted that yields on all German government bonds maturing out to the start of 2024 are still negative. Citing index data from Bank of America Merrill Lynch (BAML), he said the German bond market as a whole has returned -1.9% year-to-date. Spain is the only Eurozone economy in positive territory, managing a 0.1% return.
Even the US, where higher bond yields provide a little breathing room, wasn’t spared. According to Barley, last week’s swing still knocked down year-to-date returns to 1.9% on the BAML index, where only a week earlier the returns were at 2.7%.
“Even if yields don’t surge higher from here—with forces like demographics, regulation and still-soft inflation weighing on the market—the outlook for returns is hardly inspiring,” Barley said.
For more of Wealth Professional's latest industry news, click here.
