(Bloomberg) — Global bonds are on the cusp of entering a bear market after the fastest US inflation in four decades fueled bets the Federal Reserve will make its biggest interest-rate hike since 1994 this week.
The Bloomberg Global Aggregate Index, which tracks total returns from investment-grade government and corporate bonds, has slumped 19.7% from a record high in January 2021.
Debt markets have been convulsed since Friday when a report showed the annual US inflation rate accelerated to 8.6% in May, defying predictions that price pressures had peaked. Treasury two-year yields have jumped more than 50 basis points over the past week, climbing to the highest level since 2007.
The selloff in fixed income has wiped out almost $10 trillion of value in global bonds this year, erasing the gains made after central banks undertook unprecedented easing to cushion the global economy from a once-in-a-generation pandemic.
The global bond index has already slumped 16% in 2022, more than three times the size of the next biggest annual loss since 1990, after supply snarls, surging commodity prices, and rebounding consumer demand caught central bankers off guard, causing them to play catch-up on inflation.
Fed Chair Jerome Powell, who’s been careful to try to telegraph policy moves to markets, is under pressure to ramp up the central bank’s approach to taming price pressures at the rate decision Wednesday. A University of Michigan gauge on Friday signaled risks that longer-term inflation expectations are becoming unanchored, adding impetus to calls for more-aggressive rate hikes.
“The market is worried that the Fed is behind the curve and the risk of inflationary expectations will become embedded,” said Thu Ha Chow, head of Asia fixed income at Robeco Singapore Private Ltd. “It may be better to front-load and do 75 basis points, rather than leave concern that they will need to do even more in the next round of hikes.”