Signs global bond markets could be bottoming out after central bank rate hikes

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Signs of global bond markets may be down after the central bank rate hikes

Man checking financial charts on phone

Fixed-income investors are experiencing what could be the most challenging year for bond markets in 45 years, with 2022 set to be possibly the worst since 1931.

Bonds are units of debt issued by companies or governments that are converted into tradable assets. They contain the loan terms, such as the interest payment, bond principal and maturity date. Bonds essentially function as instruments used by governments and corporations for borrowing money. Although the stock market generates far more headlines, global bond markets are much larger in value than stock markets, with more than $100 trillion tied up in bonds worldwide versus $64 trillion in equities.

Investors generally demand higher interest rates for lending to governments over extended periods, reflecting the opportunity cost of tying up their money more amid rising growth and inflation forecasts. On the other hand, short-term rates occasionally rise beyond longer-term yields, disturbing the normal course of the bond markets. When the yield curve inverts, investors demand more interest to lend to the government over shorter periods. The abnormality implies that investors expect that economic growth will decline soon. Historically, an inverted yield curve has been a strong indicator of a pending recession. This is especially true when the US

Many consider bonds safer alternatives to other investments, and Treasury bonds are among the safest government bonds. Although bonds are less volatile and tend to outperform equities in times of economic distress, this does not mean that they are a rock-solid investment or that you should only invest in bonds.

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Olive Invest collected information about bond markets from various professional, expert and news sources to paint a clear picture of the performance of the US.

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Interest rates continue to rise, but at a slower pace

United States Federal Reserve Bank building

Two years into the worst pandemic in a century, the global economy is still struggling with the lingering effects of the COVID-19 pandemic of diminishing economic growth and soaring prices. Specifically, the US To curb inflation, the Federal Reserve leveraged the tools at its disposal, primarily interest rate hikes and the threat of more. Recently, the Fed hiked interest rates by 75 basis points. However, the pass-through effect on the bond market may cause bond prices to bottom out.

At first glance, the relationship between interest rates and bond prices may not be clear. But upon closer inspection, it becomes clear that when central banks raise interest rates, bond prices fall, ensuring that the nominal value of the bond remains constant. This is known among future brokers who study for their securities licensing exams as the teeter-totter, as the bond prices and interest rates to believe as a visual on a children’s playground. Because of the inverse relationship between interest rates and bond prices, a further decline in bond prices can be expected as the Fed continues to hike interest rates.

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Stock market volatility, driven in part by risks from Europe, is causing investors to seek safe havens like Treasury bonds

United States savings bonds with American currency

Ideally, equity markets offer higher expected returns than fixed-income markets. However, they also carry higher risks of loss. The Fed’s aggressive rate hikes and the risks of emerging market bond defaults have combined with energy crisis-related factory furloughs in Germany and other European manufacturers to scare investors. The result was a flight to safety, with institutional and individual investors turning to Treasury bonds.

Lower bond prices have begun to present lucrative opportunities for investors seeking yield but with safety. Short-term instruments currently offer rising yields at 4.48% for six months, 4.53% for one year and 4.41% for two years, while longer maturities such as the five and 10-year bonds offer yields of 4.18% and 4.01% respectively. .

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Recession talk from business and political leaders pushes stocks lower, likely sending bonds higher

Stock market graph and dollar bill

As the Fed maintains its hawkish stance and Fed Chairman Jerome Powell indicates it will continue to hike rates aggressively, industry experts and investors are worried it could push the U.S. it. Economy in recession.

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The last time the Fed raised rates aggressively to curb inflation was in the early 1980s under then-Fed Chairman Paul Volcker. The Volcker Fed rate hikes made borrowing money and mortgage rates so expensive that bank certificates of deposit insured by the Federal Deposit Insurance Corporation were yielding 18% in May 1981, close to the high-water mark of the severe recession of 1981-82.

Regarding the current outlook, Fed officials have stated that they want to continue raising interest rates above the current range of 3% to 3.25%, leaving analysts to speculate how high rates could go. However, the costs of servicing global debt burden governments have accrued over the past 40 years across the G7 nations, including the US.

With interest rates rising faster than expected, the unanticipated impacts of quantitative tightening and the expected prolonged war in Ukraine are indicators that analysts believe are likely to turn the US economy upside down. it. Economy in recession. Against this strong global backdrop, industry experts, such as JPMorgan Chase CEO Jamie Dimon, believe the S&P 500 could suffer a painful downturn. A negative outlook for the equity markets may lead investors, in turn, back into the fixed-income markets, resulting in higher bond prices.

This story originally appeared on Olive Invest and was produced and
Distributed in partnership with Stacker Studio.


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