Analysis: Bludgeoned bond markets hope peak inflation will bring revival in 2023

Dec 14 (Reuters) – Many of the world’s biggest bond fund managers, from BlackRock to Vanguard, are optimistic that sovereign debt markets will recover after a crash in 2022 with peak inflation and interest rates finally in sight. faced.

U.S. 30-year Treasuries prices gained more than 10% last month, while U.K. fixed-income funds saw a 1.09 billion pound ($1.33 billion) gain in November, the most in two years. is high, according to the Calastone fund network.

After a year that saw the bond market at its worst, optimism is returning after its No. 1 enemy — inflation — soared. Signs that inflationary pressures are easing mean that central banks may refrain from aggressive rate hikes.

“It’s too early to say the end of the potential pressure on interest rates, but the extreme volatility is over and … the distortion of the financial system by the Fed is over,” said Rick Rieder, chief investment officer of global fixed income at BlackRock. , which manages $8 trillion in assets.

The Federal Reserve’s expected half-point rate hike on Wednesday would take its policy rate to 4.25%-4.50%, from near zero in March, the fastest increase since Fed Chairman Paul Volcker took over in four decades. already fought that inflation was even worse. .

BlackRock sees short-term government bonds as attractive; Europe’s biggest fund manager, Amundi, says “bonds are coming back” in 2023.

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TURKEY POINT

A brutal push to contain inflation, exacerbated by the war in Ukraine, led to a paradigm shift in the bond market, ending more than a decade of mild inflation and low borrowing costs.

Deutsche Bank calls 2022 the first global bear market in 70 years.

As bond prices fell, yields on US, German and British 10-year bonds each climbed about 200 basis points in the biggest annual increase since 1994, putting debt markets under stress.

Tomohiro Mikajiri, head of yen and non-yen fixed income at Barclays, said: “Trading was difficult in the sense that the market did not work properly. Futures are the most common tool for hedging but there was a time when it did not work.” trade, Japan.

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In Europe, negative ratings, where investors somehow influence an issuer if it holds its debt to maturity, have become history. A year ago, 6 trillion euros worth of eurozone debt, or 67% of the market, had sub-zero yields.

Japan, stuck with an ultra-loss policy, is the only major bond market that remains in negative yields.

Andrew Balls, chief investment officer for investment, said: “The big wave of negative returns has largely disappeared, so (it’s) not the historic bull market that we saw in the early 1980s, but yields very impressive compared to last period fixed income at PIMCO, which manages $1.69 trillion.

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OPPORTUNITY

As bond yields stabilize at higher levels, many investors have increased their yields.

Jeffrey Sherman, Vice CIO at DoubleLine, which manages nearly $100 billion in assets, said his portfolio includes high quality credit and Treasuries.

Vanguard CIO Greg Davis said the “bright news” was that investors were now being compensated for holding bonds.

“We’re in an environment where you’ve bounced back from something that’s more normal than an artificial depression,” he said.

Others favor corporate debt, especially investment-grade firms with short-term debt yields now above 5%, as they see their investment as safer than earlier this year as a recession looms.

Amundi’s Group CIO Vincent Mortier said the fund’s manager was heavy government bonds and investment grade credit.

Amundi, which manages 1.9 trillion euros in assets, expects a revival of its 60/40 stock-bond investment portfolio, following what some consider its worst performance in a century as both bond prices and prices is down Dividends have been a key feature of investing for decades.

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ONCE BITE, TWICE SHAME

But with provisions that do not provide security in 2022, caution remains. As central banks swallow the trillions of dollars of debt on their balance sheets, heavy debt provision means that the headwinds remain.

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Estimates for European bond sales after accounting for central bank purchases in 2023 are around 500 billion euros.

“Depending on the scenario you look at, this could mean double the amount that private investors would need to cover compared to previous years,” said Union Investment chief economist Joerg Zeuner.

Investors have also shown a willingness to punish governments they see as fiscally unwise, as a recent rout in British bonds has shown.

Hedge fund managers attending a recent private UBS conference said now is not the time to buy long-term debt, according to a video of the conference seen by Reuters.

Finally, keep an eye on inflation, which has surprised many and could prove sticky, fund managers said.

“There are positive signs (on inflation), but I don’t think there’s any time for complacency,” said Jim Leaviss, CIO of Public Income Communications at M&G Investments.

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Reporting by Dhara Ranasinghe in London, Davide Barbuscia in New York, Yoruk Bahçeli in Amsterdam, additional reporting by Nell Mackenzie in London and Junko Fujita in Tokyo, graphics by Sumanta Sen and Kripa Jayaram, Editing by Tomasz Janowski

Our Standards: The Thomson Reuters Trust Principles.

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