But bonds are supposed to be the safe part of any portfolio. Investors expect them to offer stability when stocks and other risky investments take one of their notoriously sharp swings. Now even this part of investors’ portfolios is taking on water.
“Global bonds have entered the first bear market in a generation,” UBS strategists wrote in a recent report.
This year’s returns for the widely followed Bloomberg Global Aggregate index of high-quality bonds look to be the worst since its 1990 inception. It could be one of the worst years ever for bonds, if not the worst.
Bond prices around the world have been falling as central banks rush to raise interest rates in hopes of beating back the high inflation damaging economies globally.
Sweden’s central bank this past week more than doubled its key interest rate to 1.75%, for example. The European Central Bank recently raised its key rate by a record amount, three-quarters of a percentage point. In Washington, the Federal Reserve announced its third such hike of the year this past week.
When interest rates rise, they knock down prices for older bonds already sitting in investors’ portfolios. That’s because the older bonds’ yields suddenly look less attractive than what newer bonds are offering. Some bonds are protected from such price swings, such as I-bonds issued by the U.S. government, but access to them is limited.
Rates have risen quickly this year, with the Fed hiking its benchmark overnight rate up to a range of 3% to 3.25% from virtually zero at the start of the year. That’s helped yields hit their highest levels for two-year Treasurys since 2007 and for 10-year Treasurys since 2011.
The widespread expectation is that the Fed and other central banks will keep raising rates, which should maintain pressure on bonds.
Many professional investors say that despite these challenges, bonds should still be a safe part of any portfolio. That’s because other options look even more risky.
Rising rates can hurt stock prices even more than bonds if corporate profits don’t grow quickly, and analysts are now slashing their forecasts for upcoming profits. Gold’s price is also falling because of rising rates. Unlike bonds, gold doesn’t pay its investors any interest.
Plus, many investors hope the sharpest rate hikes may now be in the past. And if a recession does indeed hit, which some economists are predicting, bonds could hold up better than other investments as investors shift money into them and out of stocks. They have a reputation for safety, after all.