Why Have Bonds Lost $2.6 Trillion in Value?

The Wealth Advisor Contributor

March 24, 2022

(TheStreet) - Bonds have taken it on the chin recently amid raging inflation and the beginning of the Federal Reserve’s interest-rate increases.

Consumer prices jumped 7.9% in the 12 months through February, a 40-year high. And the rise in commodity prices sparked by the Russia-Ukraine war might drive that figure higher.

Meanwhile, the Fed raised its federal funds target rate by 25 basis points March 16, and Fed Chairman Jerome Powell suggested March 21 that a 50-basis point rate hike is possible in the future. The Fed’s median forecast calls for another six rate hikes this year, assuming they’re all 25 basis points.

The 10-year Treasury yield has soared 80 basis points since the beginning of the year to 2.31%.

The Bloomberg Global Aggregate Index of bonds dropped 11% from its January 2021 high through March 22, the biggest decline since at least 1990, Bloomberg reports. That translates to an astounding loss of $2.6 trillion in market value, surpassing the $2 trillion decline of 2008, during the financial crisis.

Bond prices rebounded a bit March 23, with the 10-year Treasury yield down 2 basis points. But concern about persistent inflation and coming Fed rate hikes will likely continue to drive yields higher, many experts say.

“The headwinds for fixed income remain heavy,” Todd Schubert, head of fixed-income research at Bank of Singapore, told Bloomberg. “Investors will need to recalibrate return expectations and be nimble to exploit market dislocations.”

Meanwhile, the yield curve is getting close to inversion, which occurs when short-term bond yields are higher than long-term yields. It’s a sign investors see economic weakness ahead.

Already, five-year Treasury yields have overtaken 10-year yields -- 2.34% to 2.32%. A key relationship is the two-year Treasury yield, recently at 2.11% and the 10-year yield.

Over the past 40 years, when the two-year Treasury yield traded at a premium to the 10-year yield, a recession invariably followed, according to the Financial Times.

By Dan Weilmar
March 23, 2022

Dan is a freelance writer whose work has appeared in The Wall Street Journal, Barron's, Institutional Investor, The Washington Post and other publications.