Bond ETFs extend worst decline since financial crisis

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gGlobal bond exchange-traded funds are suffering one of their worst declines since their peak last year, as central banks around the world seek to tighten monetary policies to tame inflation.

Since the beginning of the year, the iShares Core US Aggregate Bond Fund (AGG) fell by 6.2% and the Vanguard Total Bond Market ETF (BND) fell 6.3%. Over the past year, AGG has fallen by 4.5% and BND by 4.5%.

Meanwhile, the Bloomberg Global Aggregate Index, a benchmark for government and corporate debt total returns, fell 11% from a peak in January 2021, the largest pullback from a peak for data going back to 1990 and exceeding the 10.8% decline for the financial sector. crisis in 2008, reports Bloomberg.

The drop in the global bond index also translated into a decline in market value of about $2.6 trillion, compared to the $2 trillion decline in 2008.

Weakness in bond markets can be attributed to rising inflation. Rising inflationary pressures around the world fueled concerns. For investors, holding debt in an environment of rising inflation means that real returns or returns after adjusting for inflation decline. Meanwhile, given the low rate environment, the bond market has been exposed to higher rate or duration risk, since interest rates are more likely to rise than fall from these levels. close to zero.

“The safe-haven attributes of Treasuries have been undermined when you add duration risk to the equation,” said Winson Phoon, head of fixed income research at Maybank Securities Pte. Ltd, told Bloomberg.

The Federal Reserve already raised interest rates by 25 basis points last week, and Chairman Jerome Powell has said the central bank is ready to raise rates by half a percentage point at its next meeting. to help fight inflation if needed. The more hawkish tone has prompted markets to price the equivalent of seven more quarter-point hikes by the end of 2022.

“Headwinds for fixed income remain heavy,” Todd Schubert, head of fixed income research at Bank of Singapore, told Bloomberg. “Investors will need to recalibrate return expectations and be nimble to exploit market dislocations.”

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