In early October, when speaking before the NY Fed, Bridgewater's Ray Dalio made a prophetic warning: a 1% rise in yields from near-record low level would trigger "the worst decline in bonds since the 1981 bond market crash." Less than two months later he has been proven right because while we have yet to see a move quite as large as the one Dalio envisioned, the November surge in global yields has already resulted in the worst monthly loss in the Bloomberg Barclays Global Aggregate Total Return Index, which lost 4% in November, the deepest slump since the gauge’s inception in 1990, and equivalent to $1.7 trillion in losses to $45.1 trillion.
Over the past two months, the cumulative loss in the index's market value is now a massive $2.8 trillion leading leading Bloomberg to declare that "the 30-year-old bull market in bonds looks to be ending with a bang."
The conventional wisdom behind the move is by now familiar: hopes for U.S. economic momentum and Donald Trump’s election win, with promises of tax cuts and $1 trillion in infrastructure spending, have spurred investors to dump debt that was offering near-record-low yields and pile into stocks.
Calling an end to the three-decade bond bull market is no longer looking like a fool’s errand: the Federal Reserve is expected to start raising interest rates -- and do so more often than once a year, inflationary expectations are climbing and there are hints global central banks may be buying fewer sovereign securities going forward. Investors pulled $10.7 billion from U.S. bond funds in the two weeks after Trump’s victory, the biggest exodus since 2013’s “taper tantrum,” while American stock indexes jumped to record highs.
“A lot of people are beginning to think that it is the end of the bull rally,” said Roger Bridges, the chief global strategist for interest rates and currencies in Sydney at Nikko Asset Management’s Australia unit, which oversees $14 billion. U.S. 10-year yields may rise to 2.7 percent in January, Bridges said. “The trend is your friend.”
While the market's fixation has been on recent equity market gains, the reality is that these have been more than offset by mark-to-market losses across the bond world. According to Bloomberg, the record rout which wiped our $1.7 trillion from the global index’s value in November, is nearly three times greater than the gain in world equity markets’ capitalization which rose by a more modest $635 billion.
And, as noted this morning, the pain continues: the yield on 10-year U.S. notes rose 56 basis points in November, the biggest jump since 2009, and was at 2.41% in early trading on Thursday. The average yield on the Bloomberg Barclays Global gauge climbed to 1.61 percent on Nov. 23, after touching a record low of 1.07 percent on July 5.
The rise in yields shows the limitations of the quantitative easing policies at the biggest central banks, Bridges said. Bonds will be especially vulnerable if the European Central Bank discusses reducing its debt-purchase program at its Dec. 8 meeting, he said.
With many investors having shifted out of risky assets and into duration in the past year, it remains to be seen how much of this loss will impact retail investor's investing psychology once month-end P&L statements are sent out at the end of the month.