Published on Tuesday, December 27, 2022

Global | Annus horribilis for fixed income

2022 has been a dismal year for the fixed income market in general, including sovereign bonds. As the year draws to a close, bond prices, which move inversely to their yields, have fallen by an average of about 15% globally.

Key points

  • Key points:
  • The main reason for this behavior has been the abrupt change in the global inflation scenario and, above all, the 90-degree turn in central banks' policies to curb inflation.
  • In particular, the pace of interest rate hikes in the United States is the fastest in decades, while the European Central Bank (ECB), after 8 years with interest rates in negative territory, has raised them by 250 basis points in just over 6 months.
  • This aggressiveness displayed by the monetary authorities has made investors fearful of its impact on economic growth. As a result, the government bond yield curve has inverted in most developed countries, with long-term yields falling below short-term yields.
  • Central banks have another lever at their disposal, and that is to reduce the size of their balance sheets. Through this operation, they reduce their bond portfolios, drain liquidity and thus cause debt prices to fall, consequently pushing up their yields. The US Federal Reserve and the Bank of England began this process in 2022, and the ECB will follow suit in 2023.
  • We know that central banks will continue to raise the interest rate benchmarks, albeit at a lower intensity, so yields could continue to rise slightly at least in the first part of 2023.

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