“It’s been decades since we’ve seen wholesale declines like these,” said Kathy Jones, chief fixed income strategist at the Schwab Center for Financial Research.
Whatever you call it, this venerable bond index, which is mirrored by many exchange-traded funds and index funds, was down 6.2 percent this year.
They are global in scope, as are their causes — roaring inflation worsened by rising oil prices in the wake of Russia’s invasion of Ukraine, and the efforts of central banks to contain inflation.
At one point this month, for instance, the S&P 500 had fallen more than 10 percent, into the range known in market jargon as a correction, and the Nasdaq composite index was down more than 20 percent, into what Wall Street labels bear market territory, though both have since rallied.
Nonetheless, the double whammy of bad bond returns combined with poor stock market returns in the same stretch leaves many diversified stock and bond portfolios in a state of distress.
The Vanguard Balanced index fund, a plain vanilla mixture of 60 percent stock and 40 percent bonds, is down 5.8 percent for the year.
Consider that in August 2020, in the first year of the pandemic, the yield on the benchmark 10-year Treasury note fell as low as 0.5 percent.
In both cases, the Fed and the U.S.
That peak occurred, not coincidentally, when Paul Volcker was the chairman of the Fed and the Consumer Price Index was rising at a 14.8 percent rate.
Russia’s invasion on Ukraine has had a ripple effect across the globe, adding to the stock market’s woes and spooking investors.
Europe gets nearly 40 percent of its natural gas from Russia, and it is likely to be walloped with higher heating bills.
Russia is the world’s largest supplier of wheat; together, it and Ukraine account for nearly a quarter of total global exports.
The price of palladium, used in automotive exhaust systems and mobile phones, has been soaring amid fears that Russia, the world’s largest exporter of the metal, could be cut off from global markets.
What has happened since then? Briefly put, the Consumer Price Index reached a 7.9 percent annual rate, the unemployment rate dropped to 3.8 percent, and Russia invaded Ukraine, sending the prices of oil and other critically important commodities soaring.
The sharp rise in bond rates has produced some dislocations along the way, sending out signals that have, in the past, sometimes meant that a recession was on the horizon.
First, some background: Bond rates are set by traders in the market, not by the Fed.
And just this week, the Federal Reserve Bank of Dallas warned that “if the bulk of Russian energy exports is off the market for the remainder of 2022, a global economic downturn seems unavoidable.” But the war in Ukraine and Western sanctions on Russia have uncertain outcomes.
It suggests that the economy is growing rapidly, that short-term interest rates still need to rise much further — and that no recession is on the horizon.
In that regard, long-term bond investors may have a big advantage, because bond losses don’t dominate the news cycle the way declines in the stock market do.