Global bond markets enjoyed their best month in more than a year in December, as rising concerns over the health of theglobal economy sent investors in search of relatively safe assets.
The Santa Claus rally that was missing from equity markets was in full swing in fixed income, bringing some respite to battered debt investors.
The global bond market has been under intense pressure for most of 2018, as economic growth fanned fears of inflation. The Federal Reserve kept raising US interest rates and shrinking its balance sheet, and the European Central Bank trimmed and ultimately ended its own bond-buying programme.
As a result, by mid-November the Bloomberg Barclays Multiverse index, a broad gauge covering $53tn worth of government and corporate debt around the world, was nursing a 3.7 per cent loss for the year. Although modest compared to the decline in some equity markets, that put the global bond benchmark on track for its worst year in more than a decade, and US bonds were heading for their worst year since 1994.
However, the equity market ructions and fading optimism over the international economic growth outlook for 2019 sent investors scrambling back into the safety of fixed income, lifting the Multiverse index by 1.7 per cent in December. That is its best monthly gain since July 2017, and pared its loss for the year to 1.6 per cent.
“The US economy is slowing, and will likely continue to slow as this long growth cycle simply runs out of gas,” said Kevin Giddis, head of fixed income at Raymond James. “The Fed will be on hold for the foreseeable future. They may not tighten at all in 2019, and may even ease if conditions deteriorate from here.”
Underscoring the rising doubts over the economy and mounting expectations that the Fed will have to ease back on its monetary tightening plans, the global bond market bounce has been powered by the safest bonds.
The yield on 10-year US Treasury bonds has dipped from a seven-year high of 3.26 per cent in early November and on New Year’s eve it fell below 2.7 per cent for the first time since February, to end the year at 2.68 per cent. That helped the overall US government bond market to a 1.9 per cent gain in December, the best in almost two years. Yields fall as bond prices rise.
Higher-rated European and Asian government debt, as well as US municipal bonds, have also rallied from their lows, helping produce annual gains for those markets as well.
Mr Giddis believes that “unless something radical occurs”, slower growth, political gridlock in Washington and still-subdued inflation will push the 10-year Treasury yield further down to 2.25 per cent in 2019.
However, corporate debt has remained under pressure, especially bonds rated below investment grade by the major credit rating agencies, commonly called “junk” or high-yield bonds.
The Bloomberg Barclays Global High Yield index has lost 4.2 per cent this year, its worst performance since the financial crisis and only the fourth annual loss since at least 1990. Investment grade corporate debt also managed to pare losses in December, but still notched up a 3.3 per cent decline in 2018.
Scott Minerd, chief investment officer at Guggenheim, sees riskier assets, such as equities and corporate bonds, remaining unloved.
“The past month has provided not just a meteor or two but a virtual storm,” Mr Minerd said. “No doubt there is more volatility to come and, with holiday-dampened liquidity, I don’t see many investors willing to step in to buy — especially given that so many were caught offside.”