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NEW YORK, Sept 2 (Reuters) – An accelerating decline in bond markets is bringing fresh pain for fixed income investors in a year when global bonds have already lost a fifth of their value.

Yields on US government bonds have surged since Fed Chairman Jerome Powell sent an unambiguously hawkish message to markets during August’s Jackson Hole symposium, with the ICE BoFA US Treasury Index on track for its worst annual performance on record.

Bonds in many European countries, meanwhile, marked their worst monthly performance in decades in August, helping send the closely watched Bloomberg Global Aggregate Bond Index down more than 20% from its peak for the first time ever.

“This is the worst year in history by far for fixed income,” said Lawrence Gillum, fixed income strategist for LPL Financial. “If that’s not a bear market in bonds I don’t know what is.”

The devastating sell-off in bonds had seen yields on the benchmark 10-year Treasury, which move inversely to prices, hit an 11-year high in June, rally along with stocks over the summer only to sell off again, sparking fears that new lows may be coming.

While declines of more than 20% are typically called bear markets when they hit stocks, they are virtually unknown in bonds, an asset class that emphasizes stability and reliable returns. From 1990 to its peak in January 2021 – a period spanning much of a generation-long bull market in bonds – the global index had delivered an aggregate total return of nearly 470%.

Many investors are betting the weakness in bonds will continue as central banks tighten monetary policy to bring down inflation in the United States and across the world.

Investors broadly expect the Fed to raise rates by 75 basis points later this month, and some believe an equally large hike could be in store from the European Central Bank next week. A US jobs report on Friday is also being closely watched by investors.

Net bearish positioning among hedge funds and other speculative investors is up 30% since the end of July, according to Commodity Futures Trading Commission data.

Gregory Whiteley, a portfolio manager at DoubleLine, believes US inflation, which showed signs of ebbing in the latest consumer prices report, will likely persist, taking two-year yields to 4%. Longer-dated Treasuries, however, may be nearing a bottom, he said.

The Bloomberg US Aggregate Bond Index is down 12.5% from its highs, more than double any previous peak-to-trough decline going back to the 1970s.

Simeon Hyman, head of investment strategy at ProShares, has focused on higher quality corporate credit and is underweight longer-dated Treasuries.

Hyman believes additional pressure on bonds could come as the Fed reduces its balance sheet, a process known as quantitative tightening that hits its full stride in September as the central bank trims USD 95 billion a month from its holdings.

“When you take the little bit more hawkish tone from the chair and put that together with the doubling of size of quantitative tightening, you have to say to yourself ‘there’s more room for interest rates to rise,'” he said.

Some investors think the recent sell-off is a time to buy bonds on the cheap, a bet that partially hinges on the Fed slowing its policy tightening once it sees the US economy beginning to weaken.

Gene Tannuzzo, global head of fixed income at Columbia Threadneedle Investments, is betting declines in the housing market and weaker car sales are the first signs that the Fed’s rate hikes are filtering through the economy. He is favoring high-grade corporate bonds and mortgage-backed securities.

Anders Persson, chief investment officer for global fixed income at Nuveen, is adding to Treasury positions, betting that yields are unlikely to go much higher.

“Treasury markets have done a quite good job of pricing in that we won’t see a Fed pivot anytime soon.”

(Reporting by David Randall; additional reporting by Dan Burns in New York and Dhara Ranasinghe in London; editing by Ira Iosebashvili, Megan Davies and Richard Chang)

 

SINGAPORE, Sept 2 (Reuters) – Fixed maturity funds are drawing some of their heaviest flows since the pandemic started as investors, nervous about the global outlook, seek to lock in income at some of the most attractive yields in years.

Such funds, which bundle corporate and government bonds of similar maturities, drew nearly USD 3 billion between May and July, according to Refinitiv data, marking three straight months of net inflows.

While preliminary data showed about USD 1 billion of net outflows in August, money managers sound confident that the heavy outflows of 2021 and early 2022 are reversing.

Yield is the primary drawcard and it has increased as central banks around the world have lifted interest rates to tame rising inflation.

Fixed maturity funds are also considered relatively safe as they offer a predictable income stream over a fixed horizon and a diversified portfolio which reduces credit risk.

With US dollar investment grade yields at about 4.8% on three-year debt, compared with three-year Treasuries at 3.5%, investors feel the price is right.

“Inflationary pressures and recent Fed moves have finally put an end to an extended period of declining interest rates, putting interest rates nearer to the higher end within the last decade since the Global Financial Crisis,” said Doreen Saik, a senior credit analyst at global fund manager M&G Investments in Singapore.

“Coupled with a weaker macro and credit outlook and a clear Fed path, we have seen a flight to quality in IG fixed maturity funds, which are relatively more attractive vis-a-vis other asset classes.”

Turmoil in stock markets – with world shares and emerging market shares each down about 20% this year – also makes a decent steady income more alluring.

“I think as we move into the current interest rate environment, we could possibly see more fixed maturity products offered to investors,” said Benny Gay, Vontobel Asset Management’s Asia head of intermediary clients.

“Investors could get yields that are more attractive than two years ago,” he added.

“STRONG CASE”

Part of the reason investors wish to lock in yields now is that they could fall in future if inflation slows down, of which there are some tentative signs in the United States.

Of course that is not yet clear and there are no such signs in Europe yet — so both runaway inflation and the likelihood that any economic slowdown could lead to companies defaulting on their debt present risks to fixed maturity funds.

Still, the flows suggest a degree of comfort.

“You can create a portfolio of higher quality and shorter duration,” said Marcelo Assalin, head of emerging markets debt at asset manager William Blair who has noticed an uptick in client enquiries about fixed maturity funds, especially in Asia.

“The critical thing is to run a diversified portfolio with concentration to a minimum and there’s a strong case for that type of product now,” he said.

For most, that has meant buying into bundles of global bonds though there are some willing to take on more risk in Asia’s emerging markets, where some managers expect a rally once markets price a stable peak for US rate expectations.

“We … see value outside of China in both investment grade and high yield following the recent sell off,” said Luke Chua, senior investment manager at Pictet Asset Management’s emerging corporate bonds team.

“When US Treasuries stabilise, we can rebound here.”

(Reporting by Rae Wee; Additional Reporting by Tom Westbrook and Gaurav Dogra in Bengaluru; Editing by Ana Nicolaci da Costa)

 

Sept 2 (Reuters) – Euro zone bond yields held near two-month highs on Friday ahead of US jobs data that kept market focus squarely on inflation.

A Reuters poll expects the US economy will have added 300,000 jobs in August, down from the 528,000 in July that had come as an upward surprise, and a slight decline in average earnings on a monthly basis.

“The market’s probably expecting a fairly strong set of labour market numbers from the data we already have out this week,” said Peter McCallum, rates strategist at Mizuho in London.

US money markets currently price in over a 70% chance of a 75 bps Fed move this month. Another strong labour market print would cement expectations for the 75 bps move.

In the euro zone, bond yields edged lower from two-month highs reached on Thursday. Germany’s 10-year yield, the benchmark for the bloc, was up around 2 basis points (bps) to 1.59%, after rising to 1.63% on Thursday, the highest since end-June.

“I think we’re going to be range-bound in outright yields until the ECB meeting,” McCallum at Mizuho said.

“In Europe it’s more a story about the market viewing things as more fairly priced given how much has been factored in for the ECB meeting,” he added.

Italy’s 10-year yield was up 6 bps to 3.94%, after a brief rise above 4% on Thursday.

The closely-watched spread to German peers was at 235 bps, after rising to 243 bps on Thursday, when it neared levels at which the ECB first promised its new tool, now called the Transmission Protection Instrument, to contain large divergences between member states’ borrowing costs it sees as unwarranted. 

The bloc’s bond yields have delivered a third week of sharp rises this week as investors sharply raised their bets on a large 75 bps rate hike from the ECB at its policy meeting next Thursday following hawkish rhetoric from policymakers and another higher-than-expected rise in August inflation.

Money markets price in around an 80% chance of a 75 bps hike at the meeting, levels similar to Thursday, according to Refinitiv data, compared to less than 50% last Friday.

BNP Paribas became the latest bank to revise its call for a 75 bps move next week.

 

 

(Reporting by Yoruk Bahceli; Editing by Angus MacSwan)