Global Bonds Suffer Worst Monthly Meltdown as $1.7 Trillion Lost

Bloomberg.- The Bloomberg Barclays Global Aggregate Total Return Index lost 4 percent in November, the deepest slump since the gauge’s inception in 1990.

Bonds in Europe extended declines with their U.S. peers as OPEC’s agreement on Wednesday to cut oil production added to prospects of higher inflation. The reflation trade has been driving markets since Donald Trump’s presidential election win due to promises of tax cuts and $1 trillion in infrastructure spending. All this has prompted investors to dump debt that was offering near-record-low yields and pile into stocks.

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Calling an end to the three-decade bond bull market is no longer looking like a fool’s errand: the Federal Reserve is expected to start raising interest rates — and do so more often than once a year, inflationary expectations are climbing and there are hints global central banks may be buying fewer sovereign securities going forward. Investors pulled $10.7 billion from U.S. bond funds in the two weeks after Trump’s victory, the biggest exodus since 2013’s “taper tantrum,” while American stock indexes jumped to record highs.

Apart from “OPEC’s intentions to support prices, the broader pressures as regards rising inflationary expectations and the impact this is having in terms of upward pressure on yields is notable,” said Matthew Cairns, a strategist at Rabobank International in London. “The market has moved with remarkable swiftness to price in the anticipated reflationary impact of a Trump administration.”

“This has, in turn, prompted a notable rotation out of fixed income and into equities,” Cairns said. Still, he cautioned that moves are “remarkable given the distinct lack of clarity as regards what policies the president elect will actually pursue.”

November’s rout wiped a record $1.7 trillion from the global index’s value in a month that saw world equity markets’ capitalization climb $635 billion.

The yield on 10-year U.S. notes rose 56 basis points in November, the biggest jump since 2009, and was at 2.41 percent as of 7:07 a.m. in New York. Yields on similar-maturity German bunds reached a two-week high of 0.32 percent, while those on U.K. gilts rose four basis points to 1.46 percent.

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The average yield on the Bloomberg Barclays Global gauge climbed to 1.61 percent on Nov. 23, after touching a record low of 1.07 percent on July 5.

“A lot of people are beginning to think that it is the end of the bull rally,” said Roger Bridges, the chief global strategist for interest rates and currencies in Sydney at Nikko Asset Management’s Australia unit, which oversees $14 billion. U.S. 10-year yields may rise to 2.7 percent in January, Bridges said.

Read More: Few bond investors are seeing an end to the rout

The rise in yields shows the limitations of the quantitative easing policies at the biggest central banks, Bridges said. Bonds will be especially vulnerable if the European Central Bank discusses reducing its debt-purchase program at its Dec. 8 meeting, he said.

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