Already down more than 20% from its peak, the Bloomberg Global Aggregate Total Return Index of investment-grade government and corporate bonds dropped for an eighth session on Monday, the longest run since 2016. Inflation-linked debt has shed 29% in 2022.
The turmoil in financial markets that has also caused a selloff in stocks is deepening, and “bond vigilantes” are back, according to Ed Yardeni, a veteran economist credited with coining the term in the 1980s.
In Asia, the yuan and the yen are tumbling, while speculators bet the pound will slide below US$1, a level that was once virtually unthinkable.
“We are staying defensive, given the globally hawkish central banks, currency volatility – or even crisis to some extent – energy crisis and a dragging war,” said Victor Wong, a portfolio manager at BEA Union Investment Management Ltd.
Policymakers led by the Federal Reserve’s rapidly unwinding ultra-easy stances have unleashed the extended plunge in markets, especially with few signs of a shift in their aggressive postures.
The US benchmark 10-year Treasury yield held a level last seen in 2010. Boston Fed president Susan Collins and her Cleveland counterpart Loretta Mester said additional tightening is needed to rein in stubbornly high inflation.
Sticky inflation
In addition to stocks and bonds moving in tandem, “we may also have to get used to less intervention as policymakers will be more constrained as inflation is structurally stickier”, Deutsche Bank AG analysts including Jim Reid wrote in a note.
In Asia, the tumble in the currencies of the region’s two largest economies may swell into a full-fledged crisis if it spooks overseas funds into pulling out money. The cost of insuring the debt of several countries against default in the region has spiked this month.
Sheng Songcheng, a former People’s Bank of China official, warned the Fed’s policy was destabilising global markets and hurting other economies.
Despite its real-estate crisis, which has led to insolvencies, China’s yuan debt is standout, with an index showing it up 3.7% this year.
The administration of Britain’s new prime minister Liz Truss has rolled out plans for large-scale tax cuts in the face of an economic slowdown. That’s caused a slump in the pound and a record stampede out of UK government bonds, with investors anticipating it will add to the government’s already sizable budget deficit.
As for the euro area, the issue of when the European Central Bank will reduce almost €5 trillion (US$4.8 trillion) of bonds bought during recent crises is expected to be discussed at officials’ non-policy meeting in Cyprus on Oct 5 and will likely also be debated at subsequent gatherings, people familiar with the matter told Bloomberg.