BOND SELL-OFF SHOWS NO SIGNS OF SLOWING

Investors have been steadily pruning their bond portfolios this year, clearing out corporate as well as government bonds, and driving bonds into their first bear market in decades.

The Bloomberg U.S. Aggregate Bond Index, which tracks both kinds of bonds, declined more than 20 percent from its most recent high last week, the definition of a bear market.

After peaking on 4 January, 2021, it has now declined 21 percent. 

The index returned 9.2 percent in 2020 and has never before seen a bear market since it was created in 1990.

Owning both corporate and government bonds has been a conventional investment strategy: when one kind fares poorly, the other tends to perform better because each kind is affected by differing economic factors.

That strategy is not working now.

The threat of a global economic slowdown has darkened the outlook for corporate earnings and profits, while higher interest rates have caused government bonds’ prices to sag.

Mutual funds devoted to bonds have lost a collective 12 percent over the past 12 months, Lipper reported.

Funds focused on treasury bonds are off 17 percent, while those focused on corporate securities have shed 14 percent.

The dramatic sell-off has surprised many investors, although some saw it as inevitable after bond yields fell to record lows while the U.S. Federal Reserve held interest rates close to zero.

That shot bond prices higher. Prices rise as yields fall.

Treasury bonds never suffer missed payments, but their prices predictably fall as interest rates rise—something the Fed has promised will continue to happen through at least the rest of this year.

TRENDPOST: Corporate bond prices sag when investors see a rising threat that more companies will default on their debts. The rising number of defaults among junk bonds could spread to investment-grade securities, some fear. (See “Junk Bond Defaults Rising” in this issue.)