Fixed income markets are nursing their worst losses in years, setting the tone for a poor performance that is expected to continue against a backdrop of a recovering U.S. economy and a pick-up in inflation expectations.
Bank of America Merrill Lynch said this week that its global investment grade fixed income index lost 2.23 percent of its value in the second quarter – the worst quarterly performance since 1997 and potentially also the worst since the U.S. Federal Reserve starting lifting interest rates in the first quarter of 1994.
And with the Fed tipped to soon deliver its first rate hike in nine years, while inflation expectations in the U.S. and Europe pick up, the tide appears to have turned against bond markets, where yields until recently were on a one-way track lower amid weak growth and easy monetary policy.
“We were always concerned that the coming rate hiking cycle could be as disorderly as 2004 – but never imagined getting this close at such an early point prior to lift-off,” analysts at BAML said in a note published on Tuesday, referring to a “year of no return.”
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