Final yr was the worst for bond markets in additional than a century and marked the tip of a four-decade lengthy “golden age” for the asset class which is unlikely to be repeated, based on a trio of teachers.
International bonds misplaced 31 per cent in 2022, the worst annual efficiency for mounted earnings in knowledge stretching again to 1900, Dr Mike Staunton and professors Elroy Dimson and Paul Marsh wrote in Credit score Suisse’s newest International Funding Returns Yearbook.
UK bonds fared even worse, returning minus 39 per cent.
These declines stand in stark distinction to the dependable returns that bonds recorded between 1982 and 2021, when the world bond index offered an annualised actual return of 6.3 per cent, the authors mentioned. International equities returned 7.4 per cent per yr over the identical interval.
However extrapolating the “astonishingly” excessive bond returns offered within the 40 years to 2021 into the long run was “inappropriate” and “silly”, the authors mentioned, noting that since 1900 the common annualised actual return for bonds throughout the 21 international locations with steady knowledge was simply 0.6 per cent. “For buyers who had grown used to excessive bond returns and who noticed bonds as a protected asset, [2022] returns have been actually surprising.”
It was not simply bonds that endured a dire 2022, nonetheless. Equities, too, offered off sharply as excessive inflation pressured main central banks to ratchet up rates of interest on the quickest tempo in a long time, denting the attract of most dangerous belongings and ending a bull market run that started in early 2020.
Equities and bonds don’t usually transfer in tandem. Whereas shares are typically risky, bond returns over the previous 40 years, excluding 2022, have proved comparatively regular and a hedge in opposition to fairness declines. Traders hoping to mitigate market threat have lengthy exploited the unfavourable correlation between the 2 by deploying 60 per cent of their funds into equities and 40 per cent into bonds.
Whether or not that technique will as soon as once more bear fruit in 2023 after breaking down final yr is a matter of scorching debate.
Equities are anticipated to undergo if and when the worldwide financial system slides into recession, whereas cooling inflation would ordinarily enhance the attract of bonds. But 58 per cent of institutional buyers surveyed by asset supervisor Amundi and consultancy Create Analysis in January mentioned that the sample of 2022 would persist this yr.
Even when bonds regain their function as a cushion in opposition to inventory market losses, buyers shouldn’t financial institution on equity-like returns from mounted earnings, Staunton, Marsh and Dimson mentioned. “Golden ages, by definition, are exceptions. To grasp threat and return in capital markets, we should study intervals for much longer than 20 and even 40 years.”
