The 2022 bond crisis ended the “golden age” of fixed income

Last year was the worst for bond markets in more than a century, marking the end of a four-decade “golden age” for the asset class that a trio of academics say is unlikely to be repeated.

Global bonds fell 31 percent in 2022, the worst annual performance for fixed income in data dating back to 1900, Dr. Mike Staunton and Professors Elroy Dimson and Paul Marsh in the latest issue of Credit Suisse Global Yearbook of Investment Returns.

UK bonds fared even worse, falling 39 percent.

Those declines stand in stark contrast to the reliable returns bonds posted between 1982 and 2021, when the world bond index delivered an annualized real return of 6.3 percent, the authors said. Global equities returned 7.4 percent annually over the same period.

But extrapolating into the future the “staggeringly” high bond yields achieved over the 40 years to 2021 is “inappropriate” and “foolish,” the authors said, noting that since 1900 the average annualized real yield for bonds in the 21 countries with continuous data was only 0.6 percent. “For investors who were used to high bond yields and viewed bonds as a safe haven, [2022] The returns were really shocking.”

Bar chart of annualized real returns (%) showing that 2022 was a disaster for bonds

However, it wasn’t just bonds that weathered a terrible 2022. Equities also sold off sharply as high inflation forced major central banks to hike interest rates at the fastest pace in decades, reducing the attractiveness of the riskiest assets and ending a bull market run that began in early 2020.

Stocks and bonds don’t typically move in tandem. While stocks tend to be volatile, bond returns have proven relatively stable over the past 40 years, with the exception of 2022, and a hedge against stock falls. Investors looking to mitigate market risk have long exploited the negative correlation between the two, investing 60 percent of their funds in stocks and 40 percent in bonds.

It is disputed whether this strategy will bear fruit again in 2023 after failing last year.

Equities are expected to suffer if the global economy slides into recession, while a slowdown in inflation would normally make bonds more attractive. Still, 58 percent of institutional investors surveyed by wealth manager Amundi and consultancy Create Research in January said the 2022 pattern will continue this year.

Even if bonds regain their role as a buffer against stock market losses, investors shouldn’t bet on fixed income for equity-like returns, Staunton, Marsh and Dimson said. “Golden ages are, by definition, exceptions. To understand risk and return in capital markets, we need to look at periods much longer than 20 or even 40 years.” The 2022 bond crisis ended the “golden age” of fixed income

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