Global bond markets are experiencing the worst start to the new year in at least the last five years. The broadest global bond index, Bloomberg Barclays Global Aggregate Bond, has been losing 2.0% since the beginning of the year. At the same time, the average global bond yield to maturity since the beginning of the year has risen by 0.20 percentage point to the current level of 1.03%. The main reason for bond sell-off are rising inflation expectations, which are at the highest level in the US and the euro area for at least the last 8 years. The reason is, of course, investors' expectations that vaccination will allow the global economy to return to normal this year. The second reason for rising inflation expectations is, of course, the still unprecedented money printing of key central banks (quantitative easing) and very loose fiscal policies. In the US, for example, the approval of the $ 1.9 trillion stimulus package is close.
However, I believe that a true correction on global bond markets may not have even really begun yet. Although the global volume of bonds with negative yields to maturity has fallen by $ 4 trillion since the beginning of the year, as the following chart shows, the volume of these bonds is still extremely high at $ 14.1 trillion. From the logic of things, of course, negative bond yields to maturity do not make any sense, because if an investor buys such a bond and holds it until maturity, he realizes a loss with a certainty. I am therefore of the opinion that the global volume of bonds with a negative yield to maturity should continue to decline, so that, after all, investing in bonds makes sense again. If this happens and the volume of these financially repressive bonds continues to fall sharply, global bond indices are likely to record further significant losses.
Investment Strategist at Conseq Investment Management, a.s.