For most people, 2021 has not ended up being the perfect year they expected it to be and for the people of the bond market it could not be any less true.
The bond market is allergic to rising prices and, in this case, the bond market is hit with severe allergic reactions because of the rising inflation. The reaction is severe and is heading to the worst year since 1999.
It all came after Bloomberg Barclays Aggregate Bond Index (Agg) delivered a negative return of 4.8% till this date of 2021.
The roots of the crisis lie in the government handling of the debts. In early 2021, the investors went in for a reflation trade, a process where investors dumped longer-term government bonds.
They did this in the hope that pandemic recovery will lead to a period of sustained growth and inflation.
It changed in autumn when short-dated debt faced a crisis as the news of interest rates hikes by the central banks spread. They were initiating it to quell the rising inflation. Even though the move is under consideration, there is a widespread effect.
More than a third of the Agg index comprises bonds traded in the US and, the US alone saw four-decade high inflation of 6.8% in November.
US Treasury yield rose from 0.93% at the start of the year to 1.49%. At the same time, the two-year yield rose to 0.65% from 0.12%.
That reflects the falling bond prices. Experts say that investing in bonds during such a time is not good. Even if the investors look at next year for good times, that too may be under question as a similar trend could continue into next year.
Out of the rising bond markets, years that recorded negative returns were rare. The only notable crisis was in 1999 when the market lost 5.2% because the investors preferred the dot com market.
Some analysts say that it is premature to declare a crisis over this market. They argue this despite the condition of the 2021 economy and the prospect of monetary tightening policies of the central banks, especially that of the Federal Reserve.
The long-term yield market has fluctuated since March this year.
This market peaked in March and fell back, as the market moved to price three interest rate hikes from Fed and four from the Bank of England and reduction of European Central Bank’s asset purchases.
Long-dated debts’ recent strength lies in the investors’ belief that the central banks will wreck the recovery or trigger a stock market sell-off if they tighten the policies quickly.
But analysts are still hopeful as they predict from their past experiences that a year of fall, will always be followed by a year of growth. There might not be double-digit growth, but the more the rates go up, the more it will come back.
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