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Investors have posted record highs in global bond yields this year as they bet on a shift towards easier monetary policy by major banks.
Bond funds have attracted inflows of more than $600bn so far this year, according to data provider EPFR, which is expected to top out at around $500bn in 2021, as investors see a decline in prices. the lower can be a change in the fixed income of the world.
This “was a year where investors bet a lot on a big change in monetary policy” that has been supporting bond returns, said Matthias Scheiber, senior director of portfolio manager Allspring.
The combination of slow growth and low prices encouraged investors to invest in bonds with “raised” products, he added.
The record claims came despite a volatile year for bonds, which rallied over the summer before giving up their gains late in the year on growing concerns that the pace of rate cuts of the world will move slower than previously expected.
The Bloomberg global aggregate bond index – a broad measure of private and corporate debt – rose in the third quarter of the year but fell in the past three months, leaving it down 1.7 percent for the year.
The Federal Reserve this week cut interest rates by a quarter of a percentage point, its third reduction in a row. But signs that inflation is proving more stubborn than expected mean the central bank is signaling a slower pace of tapering next year, pushing down US government bond prices and the dollar to up for two years.
Despite reports of inflows into bond funds this year, investors pulled out $6bn in the week to December 18, the biggest weekly draw in nearly two years, according to EPFR data.
The 10-year U.S. Treasury yield — the benchmark for global fixed income markets — is now at 4.5 percent, having started the year below 4 percent. Yields rise when prices they come down.
Investors flocking to bond funds were driven by “pervasive fears of a (US) recession and financial meltdown,” said Shaniel Ramjee, co-head of multi-assets at Pictet Asset Management.
“Although there was a recession, it was not a recession,” he said, adding that for many investors, high yields on government bonds may not be sufficient to compensate for the loss of value acquired during the year.
Corporate debt markets have been stronger, with loans issued above corporate bonds reaching their the lowest for decades in the US and Europe. That led to an increase in bond issuance as companies sought to take advantage of the easy financing conditions.
Risk-averse investors are also attracted to fixed income products as rates, particularly in the US, have become too expensive, according to James Athey, bond portfolio manager at Marlborough.
He said: “US funds have been pulling like there’s no tomorrow, but as interest rates have normalized they’ve started to go back to their usual safe bets.”
“Inflation has dropped a lot everywhere, growth has slowed down a lot everywhere. . . and it’s a friendlier place to be a bond investor,” Athey added.
