Macroscope | Market shake-up will help bonds regain their safe-heaven status. That’s good news for investors
- The end of quantitative easing could turn out to be a good thing for bond investors as low or negative yields could be a thing of the past
- With higher yields, there is more chance that bonds will perform positively when riskier assets such as equities are falling in price
It is hard to believe how much global bond yields have risen in 2022. As of the close of markets on September 28, the yield to maturity on the US Treasury 10-year note – arguably the global benchmark rate for government bond markets – stood at 3.7 per cent. It was just 1.5 per cent at the end of 2021.
After being in a period of very low yields for many years, the world has been quickly catapulted into something that looks more like the period before the 2008 global financial crisis. This abrupt shift in the global interest rate and bond yield environment represents a regime change for bond investments.
First, investors have suffered massive losses on bond portfolios as total returns in bond markets have been the worst on record in many cases. This has been a shock as bonds are supposed to be relatively safe assets, usually held in multi-asset portfolios to dampen the volatility of equity holdings.
Historically, most of the time bond and equity returns have been negatively correlated. That has not been the case this year. Bond markets have not provided a safe haven.
Second, the bond market has presented increased volatility. Bank of America publishes a “bond volatility” index based on the implied volatility derived from option contracts on US Treasury securities. The level of that index is higher than it was during the outbreak of the Covid-19 pandemic and has only been higher during the global financial crisis itself in 2008.
