US bonds proving to be a shocking investment once again
In yet another sign of unpredictability in world markets, government bonds have once again put in an unexpectedly terrible performance.
In the case of the United States – the world’s biggest and most liquid bond market – this was meant to be the year that bond investors finally got some reasonable returns as interest rates began falling.
Instead, what was initially slated to be three official interest rate cuts shown as dot points on the predictions of the US Federal Reserve is looking increasingly like no cuts at all as inflation refuses to go quietly and economic growth remains resilient and not requiring any stimulus from lower rates.
Powell admits inflation fight will be long
Even Fed chairman Jerome Powell has admitted that the fight against inflation has stalled, an admission that absolutely whacked the bond market, which loses capital value as yields rise.
The benchmark yield on US 10-year bonds – which basically represent global risk-free returns – recently moved to a fresh 2024 high of 4.67%.
On shorter bonds such as two-year US bonds, the shock briefly caused yields to spike to 5% for the first time since November last year.
Because bond prices fall as yields rise, this has smashed bond total returns by 3%, with even “junk” bonds with yields above 7% barely offering a positive return for the year as the yield gets eaten up by falling prices.
Total returns negative
One example of the extent of the pain is the iShares 20+ Year Treasury Bond exchange-traded fund which is down more than 9% in total returns.
It wasn’t meant to be like this with many investors piling into bond funds late last year on the basis that the terrible run for bonds couldn’t continue and that the spectre of falling inflation and interest rates would provide some safe and easy yield and capital returns during 2024.
The pricing of bond funds suggested that many investors expected as many as six interest rate cuts in 2024, which indicates why the reckoning has been so severe.
Worst returns for 65 years
Instead, analysts now say that on an annualised basis long-term US bonds are suffering their worst stretch in 65 years as the inflation genie resists being put back in the bottle.
Instead of six rate cuts, many analysts are now sceptical that there will be any cuts at all this year so any good news for bond prices could be a long way off, with perhaps the main “hope” for better bond performances being a faltering economy, although so far, the economic performance has been robust.
Not much sign of good news
The US jobs market and inflation would both need to soften significantly to reverse the damage as the yield on 10-year US bonds has jumped from 3.88% at the end of 2023 to 4.67%.
As Jerome Powell put it: “Right now, given the strength of the labour market and progress on inflation so far, it’s appropriate to allow restrictive policy further time to work.”
It is not just US bonds that are in trouble with the International Monetary Fund saying that the global economy had proved remarkably resilient but that inflation was still a danger as it fell slower than expected.
The IMF raised its global economic growth forecast by 0.1 percentage point from its outlook in January to 3.2% this year and next.