The worst fixed income performance in a generation

Key takeaways

  • While some degree of public fixed income underperformance was expected in early Q1, 2022, the extent of the drawdown was a surprise to investors.
  • Fixed income – especially investment-grade sovereign debt – tends to rally when a black swan event happens, but not even a significant armed conflict in Europe managed to reverse the negative price trend in early 2022.
  • Private credit is less sensitive to macroeconomic trends, while more responsive to changes in a company or deal’s individual risk profile.

According to Bloomberg’s global aggregate index, bonds have had their worst start of the year since the inception of the data time series in 1990.1 

Bonds were already expected to underperform at the inception of the year, due to the projected rise in interest rates. From a macro perspective, however, inflation, while high, appeared manageable. And a rally in energy prices was initially welcomed as a healthy indicator that global growth was accelerating – with the additional expectation that prices would eventually level off. 

The first alarm bells rang in mid-January, as the Fed began pointing to worrying signs that inflation was not decelerating. Then, the Chinese government started imposing strict lockdowns to control the spread of the Omicron COVID variant, with potential ripple effects on global supply chains. Then, at the end of February, Russia’s invasion of Ukraine, which the overwhelming majority of investors did not expect, caused a major equity market drawdown, and a robust increase in volatility. 

But while black swan events typically spur a “flight to safety,” this specific one caused only a temporary reversal in the ongoing rise in bond yields. Even additional negative catalysts, such as talks of a nuclear escalation and the discovery of alleged war crimes committed by Russian forces as they retreated from Ukraine’s northern regions, which triggered previously unthinkable EU sanctions on part of Russia’s energy exports2, did not have a meaningful positive impact on bond prices. 

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Instead, western sanctions against Russia caused further energy-driven inflation and Ukraine’s inability to export wheat triggered a spike in global food prices. These two factors – higher energy and food prices – drove inflation higher in the US but even more so in Europe, causing a headache for central banks. But while the Federal Reserve was already expected to raise rates as a result of a strong labor market and rising wages, the European Central Bank is now expected to navigate an out-of-control, mostly supply-driven inflation even as the eurozone battles a potential recession from the war in Ukraine. The result has been a fall in eurozone bond prices – and an increase in yields unseen since the European sovereign debt crisis. 

All in all, the highly inflationary environment, the prospect of rapidly rising interest rates in the US and Europe, the recalibration of global supply chains with the increased risk of doing business in Russia and China are not good news for bond markets. And while in a risk-off environment, fixed income – especially German bunds and US Treasury bonds – are typically supposed to do well, as investors tend to use them as safe assets, after years of rallying on the back of central bank purchases, it proved to be disproportionately vulnerable to the projected rise in rates.

Meanwhile, as we pointed out in one of our previous pieces, private credit tends to be less sensitive to such rate increases. Instead, these products are more responsive to changes in company-specific, idiosyncratic risk. 

Yieldstreet offers a number of private credit products on its state-of-the-art, consumer-friendly platform

Sources:

1. The Bloomberg Barclays Global Aggregate Index is a flagship measure of global investment grade debt from twentyfour local currency markets. This multi-currency benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers. The index was created in 1999. Data as of April 19, 2022. 
2. Gas is still being excluded from the sanctions. 

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