The 2022 bond breakout has ended the “golden age” of fixed interest rates.

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

Global bonds will lose 31 percent in 2022, the worst annual performance for fixed income since 1900, Dr. Mike Staunton and Professors Elroy Dimson and Paul Marsh wrote in the latest Credit Suisse note. Global Investment Returns Yearbook.

British bonds fared even worse, yielding minus 39 percent.

These declines are in stark contrast to the reliable returns that bonds recorded between 1982 and 2021, when the world bond index delivered an annualized real return of 6.3 percent. Global stocks returned 7.4 percent annually over the same period.

But extrapolating the “amazingly” high bond yields over the 40 years to 2021 into the future was “inappropriate” and “foolish,” the authors said, noting that since 1900, average annual real bond yields in the 21 countries with continuous data. it was only 0.6 percent. “For investors who are used to high bond yields and who have viewed bonds as a safe haven, [2022] the comebacks were truly shocking.”

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

However, it wasn’t just bonds that endured a terrible 2022. Stocks also sold off sharply as high inflation forced major central banks to raise interest rates at their fastest rate in decades, undermining the appeal of the riskiest assets and ending the bull market run that began in early 2020.

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Stocks and bonds typically do not move in parallel. While stocks tend to be volatile, bond yields over the past 40 years, excluding 2022, have proven relatively stable and have provided a hedge against falling stocks. Investors hoping to mitigate market risk have long taken advantage of the negative correlation between the two by investing 60 percent of their funds in stocks and 40 percent in bonds.

It is hotly debated whether this strategy will bear fruit again in 2023 after last year’s collapse.

Equities are expected to suffer if and when the global economy slips into recession, while cooling inflation would generally increase the appeal of bonds. Even so, 58 percent of institutional investors polled in January by asset manager Amundi and consultancy Create Research said the 2022 pattern would continue this year.

According to Staunton, Marsh and Dimson, even if bonds regain their cushion against losses in the stock market, investors should not rely on equity-like returns from fixed income. “Golden ages are, by definition, exceptions. To understand capital market risk and return, we need to look at periods much longer than 20 or even 40 years.”

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