After tanking last year, bonds are poised to record their best January performance since 1991 as investors see inflation declining across the world’s leading economies, the Financial Times reported.

New data shows inflation falling faster than expected in the Eurozone last month. December’s inflation pace in the U.S. was 6.5 percent, down from 7.1 the month before.

After falling more than 16 percent last year, the Bloomberg Global Aggregate bond index has added 3.1 percent already in 2023, fueled largely by investments in government debt. (See “Emerging Nations Raise $40 Billion in Bonds This Year” in this issue.)

Government bonds’ surge in popularity has driven the yield on the U.S. 10-year treasury note down to 3.49 percent on 16 January after ending last year at 3.83 percent. Yields fall as bond prices rise with demand.

As inflation eases, bond buyers also are betting that central banks will raise interest rates in lesser increments than they did last year; some are wagering that the U.S. Federal Reserve will cut rates by next year. (See “Will The Fed Cut Rates This Year?” in this issue.)

Bond enthusiasts also are banking on traditional wisdom that economic hard times and volatile stock markets will send conservative investors back to bonds as a safe store of value.

“It’s like night and day,” fixed-income strategist Richard McGuire at Rabobank told the FT. “Last year was historically bad but there’s every sign that this one is going to be much better for bond investors.

“Growth is slowing, inflation is decelerating, and we’re confident that the peak in [central bank interest rates] has already been priced,” he said.

“It’s very rare to have a big down year for both stocks and bonds, and last year was the first year since 1974 where you had both down,” David Kelly, JPMorgan Asset Management’s chief strategist, noted in an FT interview.

“You typically bounce the following year and I think that’s what’s happening now,” he added.

TRENDPOST: Investors jumping back into bonds are downplaying two negative factors.

First, Fed rate-setters continue to emphasize their determination to drag inflation back to 2 percent, which will require boosting the key rate above 5 percent and leaving it there for some period.

Second, the fuse is still burning on emerging nations’ debt bombs. As we have noted in articles such as “Strong Dollar Means Weakness in Emerging Nations” (12 Oct 2022) and “Tick Tick Tick: The Debt Bomb’s Timer is Counting Down” (13 Dec 2022), many low-income countries are poised on the edge of default or already have gone over it.

There is no sign that the South’s impending debt crisis has eased. Serial defaults throughout those nations, with Egypt, Ethiopia, and Pakistan among more than 70 nations staggering under heavy debt, could roil the world’s bond markets and quickly unravel this year’s extravagant gains.