Emerging market (EM) local debt is down 14%, with nearly 60% of the negative returns driven by currency effects. With regard to the significant geopolitical tensions present today, positive results have yet to be produced when taking on currency risk within bonds. 7 Given that spreads have widened from 290 basis points to start the year to 587 bps (9% above their 20-year average), 8 it is no surprise that high yield’s poor first-half showing can be nearly equally attributed to duration (i.e., rising rates) and credit risks. 6 Attribution shows that 60% of high yield’s worst-ever first-half return (-14%) was from credit effects. Measures of implied volatility on high yield and investment-grade corporate bonds are both above the 90th percentile over the past five years. Slowing growth fears and rising rates have weighed on credit.
Market watch bonds full#
The latest occurrence took place during the first full trading week of July, as slow growth/recessionary fears pushed down the US 10-year yield. The first two times were from a sharp move in the US 2-year yield in anticipation of the implementation of aggressive rate hikes from the Federal Reserve (Fed). The traditional US 10-year minus US 2-year rate has now inverted three times in the past 90 days. Given the broader volatility in rates, there have also been significant gyrations from the US yield curve. Implied volatility metrics paint a similar picture, as the ICE MOVE Index level is in the 99th percentile over the past five years. 4 However, this is still below the volatility witnessed during the Global Financial Crisis (9.4%).
Other metrics of realized rate volatility are elevated as well, as the rolling 90-day standard deviation of returns for the intermediate portion of the Treasury curve is above (7.3%) where it was at the onset of the pandemic (6.2%). As of the end of June, there have been 35 occurrences of plus-or-minus 0.5% moves on the Bloomberg US Aggregate Bond Index (Agg) this year - the most since 2008 (45) - and we are only six months into 2022. Troubling 2022 bond market returns have been met with outsized volatility. Volatility and Uncertainty Reach All Bond Markets Selective flexibility through tailored duration and credit allocations may help investors sail through the risks that continue to swirl this summer. The myriad macro risks moving markets this year have created an intensely challenging and complex environment for investors. 2 The negative returns haven’t been confined to one specific market either, as all 16 fixed income markets/sectors we track are down on the year. On a rolling six-month basis, the return on bonds for the first six months of 2022 ranks as the third worst of all time dating back to 1975. Core bonds have had their worst start to a year ever, falling 10% through the first six months of 2022 1 as a result of the rise in interest rates.
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