Bond market ‘sinking’ in early 2022 unlikely to become the norm, says Nuveen CIO


It’s easy to feel bad about bonds after an incredibly bad first quarter.

A sharp rise in Treasury rates this year has been a massive drag on fixed income, with losses feeling even more acute when paired with a stock market rout that bottomed the S&P 500 SPX index,
back into correction territory on Friday for the second time this year.

“Investors aren’t used to seeing dramatic losses in their bond portfolios, especially when stock markets are also down sharply,” Saria Malik, chief investment officer at Nuveen, TIAA’s asset manager, in a note. customer Monday.

How bad has 2022 been? The total return for the investment grade corporate bond market was -12.3% in the year to April 29, compared to minus -8% for high yield, -12.1% for convertibles and – 12.9% for the S&P 500, according to CreditSights.

The good news is that Malik thinks the steep bond market losses are unlikely to continue, especially since debt markets have held up in past rate hike cycles (see chart), from 1994 to 2018.

Debt has held up through past hiking cycles

Nuveen, Bloomberg, Credit Suisse Leveraged Loan Index

Loans, often issued in the form of floating rate debt, have been the best performers with annualized total returns of 5.9% in previous up cycles, while US core bonds have produced a total annual return of about 2.2%.

Many individual investors gain exposure to bonds and debt through exchange-traded funds. The largest exchange-traded investment-grade corporate bond fund in the United States, LQD,
is down nearly 16% year-to-date; its counterparts in high-yield HYG,
or “junk bonds JNK,
” are closer to 10%; and the iShares Core US Aggregate Bond ETF AGG,
is 10.5% lower, according to FactSet.

Looking ahead, Malik’s team sees “value emerging from the wreckage of the bond market,” potentially including in longer duration assets.

Yields serving as a key component of bond prices have soared dramatically this year, with the benchmark 10-year Treasury yield TMUBMUSD10Y,
at 2.995% on Monday, its highest level since Nov. 30, 2018, which was close to the end of the Federal Reserve’s last rate hike cycle.

“A similar rate shock seems unlikely in the near term for a number of reasons,” Malik wrote:pointing out that much of the “bad news (Fed hikes, inflation)” is likely already priced into bonds, along with fairly decent fixed income fundamentals and bond resilience after previous selloffs during downturns. Fed hike.

Read more: Why aiming for a ‘soft landing’ for the economy doesn’t guarantee one for Wall Street


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